Wednesday, December 4, 2019

“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate rewards.” --John Templeton



INFLATION'S GYRATIONS (December 4, 2019): When I wrote my last update on August 7, 2019--I will try not to wait so long before the next one--the media were obsessed with the inverted U.S. Treasury curve, the insistence that we were headed for an imminent recession, and the "certainty" of continued all-time record low long-term U.S. Treasury yields. Practically all that anyone debated in August was when a U.S. recession would arrive and how much lower long-dated U.S. Treasury yields would drop as a result. After falling to all-time lows on August 28, 2019, yields on the 10-, 20-, and 30-year U.S. Treasuries have been rebounding. All of a sudden almost no one is worried about a U.S. recession any more. The 4-week U.S. Treasury no longer has anywhere near the highest yield in the entire Treasury curve as had been the case in the late summer.


Investors have shifted within four months from an obsession with recession to an even more absurd overconfidence in ever-rising U.S. asset valuations.


During recent weeks we have experienced some of the most intense net exchange-traded fund inflows in history along with rare extremes of optimism in surveys which date back several decades. Daily Sentiment Index on Wednesday, November 27, 2019, the date of the exact top for the S&P 500 and the Nasdaq and even the Dow Jones Industrial Average, showed 89% of futures traders who were bullish toward the S&P 500 and 91% who were bullish on the Nasdaq Composite Index--and only 26% bulls toward gold. On the exact day when I had written my last update on this site on August 7, 2019, the American Association of Individual Investors (AAII) reported only 21.7% of investors who were bullish toward U.S. equities while 48.2% had been bearish. 2019 year-to-date net inflows for U.S. exchange-traded funds set a new all-time annual record with several weeks to go, surpassing last year's peak which had been the previous high-water mark by a wide margin. Investors who shunned U.S. equities by making substantial net outflows when the S&P 500 had been below one thousand in 2008-2009 have since been making massive net inflows with the S&P 500 near and above three thousand. Selling low and buying high, as usual, is unfortunately what usually occurs in real life. After an extended pullback assets look the most dangerous whereas they are actually the safest and most rewarding. Buying an asset after it has already gained 373% (from 666.79 on March 6, 2009 to 3154.26 on November 27, 2019) will tend to be considerably less profitable than buying it before it has done so. Psychologically an asset which has been climbing for more than a decade appears to exude superiority and safety when it is maximally dangerous to be long. Conversely, an asset which has suffered an extended decline as energy shares have done during the past two years makes it seem to be intrinsically inferior and dangerous when it is maximally safe and rewarding.


Small- and mid-cap U.S. companies are continuing to resist all attempts to regain their 2018 zeniths.


Throughout 1929 small- and mid-cap shares mostly never reached their highs from 1928 even while large-cap shares mostly did so; U.S. stocks thereafter suffered their worst percentage losses in history. Throughout 1972 and into January 1973 U.S. small- and mid-cap shares couldn't recover their 1971 highs while the largest-cap "Nifty Fifty" names kept climbing; this was followed by the biggest stock-market plunge since the Great Depression. Very few investors know or care that the New York Composite Index which has existed for decades has still not regained its January 26, 2018 top, while the Russell 2000 has not set a new all-time high since August 31, 2018. The most severe bear markets in U.S. history all have in common an extended period of underperformance by smaller and medium-sized companies relative to their large-cap counterparts. The markets are telling you loudly and clearly what is going to happen next; all you have to do is respect history and listen.


The U.S. dollar index climbed to its highest point since May 2017 and has begun a major multi-month decline.


The U.S. dollar index completed a top of 99.667 on the first trading day of September 2019 which was nearly regained on the first trading day of October. Until it had recently been surpassed by speculative bets on higher U.S. asset valuations the most overcrowded trade worldwide was betting on a stronger U.S. dollar versus nearly all global currencies. The theory was that the U.S. economy, while far from perfect, was the cleanest dirty shirt in the laundry. This is a badly soiled theory which relies heavily on the spin cycle, since the only thing truly dynamic about the 2%-growth U.S. economy has been its outperforming U.S. assets. Whenever any sector outperforms investors tend to invent nonexistent reasons for its having done so along with projections of unending future gains; recent extended losses will lead to nonsensical explanations about "why" any asset has retreated and why it will keep dropping in price. No one wants to admit that something has become far above or far below fair value just because herds of stupid investors have been irrationally crowding into or out of any given asset.


Energy shares remain compelling bargains with most of them having dropped by more than half since their respective January 2018 highs.


Energy shares not only went strongly out of favor but have had among the greatest losses of all sectors since their respective January 2018 peaks and are even farther below their elevated highs of June 2014. Most energy shares have lost more than half their value within less than two years. Exchange-traded funds in this sector which I have been gradually buying at first into lower lows and during the past two months into higher lows include all of the following: XES (oil/gas equipment/services), FCG (natural gas producers), OIH (oil services), and PSCE (small-cap energy). PSCE has slid from its June 2014 top by (53.37 - 5.95) / 53.37 or more than 88.8% which makes it among the worst-performing non-leveraged funds in any category over the same time period. This is because both energy and small-cap shares are simultaneously out of favor, making this a rare double play on these unpopular concepts. Other funds in this sector include RYE (equal-weight energy) and IEZ (oil equipment and services). All of the above funds have been forming higher lows for various periods of time. Before assets rally sharply higher they almost always discourage investors by creating a bottoming pattern consisting of a deep nadir followed by a sequence of progressively higher lows. Instead of being encouraged by the higher lows, investors perceive these as a sequence of failed rallies, and therefore often end up doing net selling when they should be gradually buying into all higher lows.


One worthwhile individual energy name is MTDR (Matador Resources). This little-known company is geographically surrounded by two large giants which might eventually initiate a takeover. Even if that takes years to occur, insiders including CEO/founder Joe Foran have been persistently buying near and below 14 dollars per share including the past several trading days.


I have sold most of my developed-market equity funds and a modest percentage of some emerging-market equity funds if they have a strong positive correlation with U.S. equity indices.


We are likely in a period where U.S. assets including U.S. equity indices will mostly experience corrections exceeding 20% over the next several months. During the same time interval the U.S. dollar will usually be retreating. I have been selling a large percentage of the Western European, Japanese, and related securities which I had mostly purchased at depressed prices when they progressively slid toward their Christmas 2018 bottoms. Often I have been selling these on the exact days when they have achieved favorable long-term capital gains or shortly thereafter. The stronger their positive correlation with U.S. assets, the more essential it has been to keep selling these into strength--especially into all sharp short-term rallies.


I had also bought many emerging-market securities which had mostly bottomed in October 2018 and made higher lows in December 2018. I have retained assets such as PAK, GXG, ECH, ARGT, along with my funds of commodity producers and related assets such as GDXJ, COPX, and REMX--and anything where a falling U.S. dollar will have a much more positive impact than the negative drag of sliding U.S. assets.


Investing Tip #1: respect insider activity.


In each update starting today I will include a fundamental concept of my investing strategy which is a combination of value and behavioral methods. I try to combine the best ideas of value giants including Benjamin Graham, John Templeton, Seth Klarman, and Ray Dalio, along with behavioral concepts from Howard Marks, Daniel Kahneman, Amos Tversky, and Gerd Gigerenzer. I gladly steal others' ideas since they are so often better than my own.


Top executives, especially those in certain companies, tend to have a proven track record of far outperforming median investors. One key reason is that they know exactly what is going on with their companies so if they are buying their own company's stock with their own money it must be meaningful. Another reason is that insiders are classic value investors. They don't fret about the concerns of amateur investors such as what will happen next week, what the media are saying, whether they are buying "at the bottom," or their average purchase price. They don't do lump-sum trading: they keep gradually buying when valuations are the most in percentage terms below fair value while gradually selling when prices are the most above fair value. Insiders couldn't care less whether they are raising or lowering their average purchase price. They don't do swing trading, don't use stops, and could care less about breakouts or moving averages. Investors would be wise to follow their example.


Insider activity is the most meaningful when numerous executives of different companies within a single sector are simultaneously buying or selling in unusually intense total U.S. dollar volume. During the past half year energy executives have smashed all-time records of insider buying including their aggressive gradual accumulation during the past several trading days.


Summary: the two most irrational extremes today are 1) underpriced energy shares and 2) overpriced U.S. assets.


When I wrote my last update investors were illogically obsessed with an imminent recession and had zero fear of inflation. Today recessionary concerns have almost disappeared but investors still don't realize that inflationary expectations are set to sharply surge higher. Investors have become dangerously complacent about the downside risks for U.S. assets, being far more afraid about missing out on future gains for U.S. equity indices than they are about the possibility of losing money. As always, capitalize upon investors' herding behavior by acting before they realize what is really going on.


The bottom line: keep buying energy shares into additional higher lows while selling U.S. assets into lower highs.


Tax-loss selling has been especially rough on energy shares and could potentially continue through the end of December 2019. Meanwhile, investors encouraged by their 2019 gains will periodically create upward surges for U.S. assets including equity index funds, high-yield corporate bonds, and related assets. Keep buying energy shares into higher lows and selling U.S. assets into rallies.


Disclosure of current holdings:


From my largest to my smallest position I currently am long GDXJ, 4-week U.S. Treasuries yielding 1.649%, the TIAA-CREF Traditional Annuity Fund, SIL, XES (some new), ELD (some new), FCG (some new), SEA, SCIF, OIH (some new), PSCE (some new), ASHS, GDX, VNM (some sold), ASHR (most sold), bank CDs, money-market funds, GXG, I-Bonds, URA, SLX, PAK, EPOL, EZA (some sold), ECH, LIT, HDGE, TUR (some sold), FM (some sold), EPHE (some sold), MTDR (some new), EGPT, REMX, FXF, COPX, WOOD, ARGT, GOEX, BGEIX, NGE, EWW (some sold), AFK, RSXJ, FXB, EWM, GREK (some sold), EWG (most sold), EWU (most sold), EWI (most sold), JOF (most sold), EWD (most sold), EWQ (most sold), EWK (most sold), EWN (most sold), RGLD, WPM, SAND, SILJ, IDX (some sold), CHK.


I have a significant short position in XLI, a moderate short position in SMH, and a modest short position in CLOU. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise just about exactly 30.0% of my total liquid net worth.


"Those who cannot remember the past are condemned to repeat it" (George Santayana). "Those who can remember the past but insist that it's different this time deserve to repeat it" (Steven Jon Kaplan).


I expect the S&P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bottoming pattern occurring with frequent sharp downward spikes perhaps during the final months of 2020 and into the first several months of 2021. During the 2007-2009 bear market, most investors by Labor Day of 2008 still didn't realize that we were in a crushing collapse, and I expect that at least until around the middle of 2020 most investors will similarly persist in believing that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and most other small- and mid-cap U.S. equity funds have persistently underperformed their large-cap counterparts except before sharp rebounds; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, 2000-2002, and 2007-2009. The Nasdaq in 2018-2019 never quite achieved its March 10, 2000 intraday zenith in inflation-adjusted terms and has thereby completed a historic long-term double top. A two-thirds loss from its recent zenith would put the S&P 500 near 1050 and I believe that its valuation will become even more depressed at some unknowable level below one thousand; eventual widespread fear over how much further prices will drop is likely to be accompanied by all-time record investor outflows from most U.S. equity index funds and U.S. high-yield corporate bond funds before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all major U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than U.S. equity bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next historic bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.

Wednesday, August 7, 2019

“The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view.” --Michael Steinhardt



INFLATION BEFORE RECESSION: BUY ENERGY SHARES (August 7, 2019): The media have become obsessed with the belief that the U.S. economy is heading for an imminent recession. A primary flaw in this reasoning is that U.S. equity bear markets for more than two centuries have followed a reliable pattern in which events occur in a certain sequence. This order of operations has a resurgence of inflation occurring well before the U.S. economy experiences negative GDP growth which defines a recession. There are other elements in this sequence which are also consistent and which are repeatedly misinterpreted by investors each time we are in a new U.S. equity bear market, including rallies for commodity producers beginning with precious metals and usually ending with energy. Investors foolishly conclude that "it's different this time" and then the same patterns repeat yet again.


The first, second, and now the third primary stages of a U.S. equity bear market are proceeding precisely on schedule.


On August 31, 2018 the Russell 2000 completed its all-time intraday zenith at 1742.0889. When this index of two thousand out of 3600 U.S. companies began to persistently form lower highs in September 2018 while the S&P 500 continued to set higher highs, it was beginning a pattern which has characterized all major U.S. equity bear markets throughout history. While the Russell 2000 did not exist in 1929, most small- and mid-cap U.S. stocks persistently underperformed their large-cap counterparts from roughly Labor Day 1928 through Labor Day 1929. This was followed by the worst bear market in U.S. history with losses averaging seven out of eight dollars by the ultimate nadir in July 1932. The same pattern repeated several decades later when large U.S. companies including the S&P 500 Index continued to climb into January 1973 while most baskets of small- and mid-cap companies had peaked in 1971-1972. This was followed by the worst bear market since the Great Depression. A dozen years ago the Russell 2000 completed a double top on June 1 and July 9, 2007, while the S&P 500 didn't top out until October 9, 2007 and the Nasdaq reached its cycle high on October 31, 2007. Overall the Russell 2000 during 2007-2009 dropped 60.0% while the S&P 500 slid 57.7% from top to bottom.


Small- and mid-cap U.S. companies have been far underperforming their large-cap counterparts for nearly one year.


The situation during the past year has been eerily similar to the severe past bear markets listed above. From their summer 2018 highs to their Christmas 2018 lows, the Russell 2000 dropped by (1742.0889-1266.9249)/1742.0889 or 27.3%, while the S&P 500 only lost (2940.91-2346.58)/2940.91 = 20.2%. The first pullback in a bear market is almost always followed by a strong rebound, and both of these indices recovered--but by very different margins. The S&P 500 repeatedly set new highs in 2019 until it achieved a new all-time top of 3027.98 on July 26, 2019. The Russell 2000 never got anywhere near its prior-year high, only reaching 1618.37 and doing so on May 6, 2019 to continue its pattern of peaking ahead of the S&P 500 and at significantly lower highs. My essays regarding this topic on SeekingAlpha.com drew derision from some who were either ignorant of history or who refused to believe that this kind of underperformance was a reliable signal of a severe bear market. The recent sudden slide has finally gotten some people to realize that, alas, we could be in some kind of downtrend after all. The media have created the illusion that the latest U.S. stock-market pullback was caused by Trump, tariffs, earnings, employment data, and other allegedly unpredictable events. However, the Russell 2000 has been screaming loudly and clearly that a major loss would have to happen relatively soon. Because valuations were so much higher in 2018-2019 than they had been in 2007, the overall percentage losses will be proportionately greater, probably exceeding two thirds from top to bottom for nearly all U.S. equity indices. However, most of these losses will occur during the final months of the bear market, and not before several other key developments occur which I will list below.


The U.S. dollar just began to retreat from its highest level since May 2017. As the greenback grinds lower, this will be inflationary rather than recessionary. A U.S. recession won't occur until the U.S. dollar begins to sharply rebound from multi-year lows versus most global currencies.


The U.S. dollar has generally acted strongly, reaching 98.932 on Tuesday, August 1, 2019 which marked its most elevated point in over 26 months. The strong U.S. dollar has encouraged investment into all U.S. assets including stocks, corporate bonds, Treasuries, and real estate, while discouraging investment into commodity-related assets and non-U.S. stocks and bonds which tend to correlate inversely with the greenback. Just as bear markets reliably feature small- and mid-cap U.S. stocks underperforming large-cap shares, they also tend to experience substantial losses for the U.S. currency versus most other global currencies during the middle of the bear market. During the 2007-2009 bear market which began with the Russell 2000's first peak on June 1, 2007, the U.S. dollar index slumped to its all-time bottom of 70.698 in March 2008, and after briefly rebounding, retreated again to complete a double bottom at a slightly higher low in July 2008. Thus, the greenback moved dramatically lower for roughly one year. During this time all of the following occurred: commodity producers were among the world's strongest equity sectors; many emerging markets rose while U.S. stocks mostly moved lower; and inflation--which was widely considered in the middle of 2007 to be subdued and irrelevant--became unexpectedly widespread.


The major inflationary bout of 2008 has already been forgotten by most investors, and almost no one recalls similar surges in years including 1973, 1948, and 1937. The same phenomenon is about to occur again as precious metals are warning us.


By the final months of 2007 gold, silver, and related assets had been climbing strongly since June 2006 but their message was generally ignored. In early 2008 agricultural prices rose so suddenly, and by hundreds of percent apiece. My local bakery posted futures charts for the only time in their history on their front window to show customers that they weren't profiting from their sharply higher prices. In India they actually banned the export of rice until they discovered that tons of rice were rotting in warehouses. By July 2008 almost everything else had been soaring in price including a new all-time peak for gasoline and most energy products. In the current cycle, after having fallen to a 2-1/2-year bottom on September 11, 2018, precious metals and their shares have been among the top-performing sectors. This has significant inflationary implications which so far have been muted largely because of the strong U.S. dollar. As the greenback retreats, inflationary pressures will become increasingly evident and will eventually crowd out the current obsession with an imminent recession. Before we have anything resembling negative U.S. GDP growth we will have consumers complaining about high prices for gasoline, food, and many other essential goods and wondering if the inflationary spiral will get much worse.


During the current phase of the U.S. equity bear market the biggest percentage gains often occur in whichever commodity-related and emerging-market assets have become the most depressed and oversold.


Energy shares have become among the least popular areas for current investment. Exchange-traded and closed-end funds in this sector including XES (oil/gas equipment/services), FCG (natural gas producers), OIH (oil services), and PSCE (small-cap energy) are enormously below their respective January 2018 highs with many of them losing over half their value. Several of these are commission-free with some brokers including RYE (equal-weight energy) having zero commissions with E*TRADE and Schwab while IEZ (oil equipment/services) and FENY (energy index) are commission-free energy funds at Fidelity. Only alternative energy funds including TAN (solar) and FAN (wind) have been relatively strong, almost certainly due to the increased popularity of "green" investing strategies. As the prices of energy shares have experienced extended pullbacks, many investors have been selling primarily because they see others selling and as their persistently sliding valuations make them emotionally seem to be inherently inferior. This has encouraged huge net outflows from most energy funds. At the same time, top corporate energy executives recognize the irrationally low prices and have been making the most intense insider buying in this sector since their previous deep bottoms of late 2015-early 2016 and late 2008-early 2009. No matter how many times in the past energy shares have doubled or more during their periodic bull markets, investors inevitably conclude that "it's different this time" and only participate after most of the gains have already been achieved.


The traders' commitments for natural gas show an unusually rare commercial net long position--observe the dramatic shift indicated by the maroon bars in the following chart:


Commercials are those who actually use an asset in their line of business, versus speculators and other investors who only use it for trading.


Numerous other non-precious commodity producers have also been trading not far above multi-year lows.


Other exchange-traded funds of commodity producers including COPX (copper), REMX (rare earth), LIT (lithium/battery), and WOOD (timber/forestry) have become simultaneously depressed, and I have been gradually accumulating these for the first time since around Christmas 2018. Insiders have been buying at these producers including executives with proven long-term track records of making money on these trades including FCX insiders. The traders' commitments for copper highlights a sharp shift toward the commercial net long side in recent months:


Numerous other sectors also tend to rally at this point during a U.S. equity bear market, usually for somewhat less than one year overall.


Other exchange-traded funds which tend to rally strongly when the U.S. dollar is retreating and when the Russell 2000 is mired in a lengthy bear market include SEA (sea shipping) and SLX (steel manufacturing) along with many emerging-market stock and bond funds. Country funds including NORW (Norway) and GXG (Colombia) correlate positively with energy prices due partly to their above-average concentration in the energy industry.


No worthwhile investment lasts forever, but rising inflationary pressures are likely to continue into somewhere around the middle of 2020.


When top corporate insiders aggressively buy into any sector, as energy executives have been doing, they do not expect a rapid recovery and a quick profit. They must hold their shares for more than six months in order to qualify for favorable treatment. Timing is always unknowable, but it is likely that energy shares and other inflation-loving assets will rally--with several sharp pullbacks whenever momentum players have recently chased after any of these--until the late winter, the spring, or possibly the early summer of 2020. Watch the U.S. dollar's behavior, insider activity, and net fund flows as valuable clues as to when to sell. Eventually the U.S. dollar will begin to rebound unexpectedly from multi-year lows versus most currencies, while top executives become heavy sellers of their shares and several funds enjoy huge net inflows. This will signal that the most knowledgeable participants are getting out just as the public--as always--eagerly piles in during a major topping pattern. Just as you will be buying energy shares now when everyone you know is bailing out of them, you will be closing out your positions when your friends are asking you which ones you own because they don't want to miss out.


U.S. stocks, bonds including corporates and Treasuries, and real estate will all mostly move lower during the upcoming year and then except for U.S. Treasuries will plummet dramatically lower during the following year.


During most of the upcoming year, nearly all U.S. assets including stocks, corporate bonds, Treasuries, and real estate will choppily decline significantly more than most investors are currently anticipating. This won't have anything to do with recession, but due to these assets having become irrationally popular and very overvalued relative to historic norms. The only time in history that U.S. real estate was more overpriced in some regions was in 2005-2006 and prices have already been falling--in some cases for more than a year--in an increasing number of U.S. neighborhoods. U.S. stocks overall were only higher in relative terms at the very end of 1999 and the beginning of 2000, while U.S. high-yield corporate bonds have never been more overpriced than they had been in July 2019. One defining feature of the upcoming year is how U.S. assets of all kinds will be moving lower except during swift rebounds from intermediate-term bottoms, while they are gaining in most other parts of the world and in commodity-related sectors.


Long-dated U.S. Treasuries will likely decline sharply for roughly one year as the current recessionary obsession is replaced by fears of continued inflationary increases.


The yields on the 10-, 20-, and 30-year U.S. Treasuries have plunged to absurdly low levels due to misplaced concerns about an imminent U.S. recession. As investors progressively realize that inflation is a more serious presence and that the anticipation of recession had been premature, the Treasury curve will steepen while long-dated U.S. Treasury yields will likely climb to multi-year highs at some point during 2020. This means that we will have substantially higher U.S. 30-year fixed mortgage rates which will put additional downward pressure on current overvalued and mostly unaffordable U.S. real estate.


Starting sometime in 2020 we will experience the worst part of the current bear market, probably continuing into some part of 2021.


Beginning sometime around the middle of 2020 and continuing probably into the first several months of 2021, assets worldwide will mostly plummet except for a tiny number of safe havens including the U.S. dollar and U.S. Treasuries.


Summary: eventually we will suffer a severe recession, but first inflation has to run its course.


Between now and roughly the spring of 2020, global equities and commodity producers will mostly climb--some quite sharply--while U.S. stocks fluctuate in both directions while mostly losing value. The current correction for U.S. equity indices will likely result in overall losses which are greater in percentage terms than their declines during the final months of 2018. These will probably be followed by strong rebounds into some part of 2020, not that different from what we experienced after Christmas 2018 but following a somewhat different timetable. Just as had been the case earlier in 2019, investors at some point during the first several months of 2020 will mostly conclude that we just had another correction but that U.S. stocks remain in a strong bull market. Once again the persistent pattern of lower highs and underperformance of the Russell 2000 and other baskets of small- and mid-cap U.S. shares won't be taken seriously. The U.S. dollar will keep dropping until around the middle of 2020. At that point we will suddenly experience a sharp rebound for the U.S. dollar, renewed losses for U.S. stocks and corporate bonds, and accelerated declines for U.S. real estate. Only at that point will we finally enter a deep recession.


The bottom line: inflation will precede recession. Especially now that everyone is obsessed with an allegedly slowing economy, it will likely become overheated sometime during 2020.


U.S. recessions are almost always preceded by powerful inflationary surges. This was just as true in 1937, 1948, 1973, 1980, 1990, 2001, and 2008 as it is today. With the Russell 2000 having dropped over 13% in nearly one year from its August 31, 2018 intraday peak (as of its August 6, 2019 close) and the S&P 500 outperforming, this is a typical severe bear market. As the vast majority of investors are expecting a higher U.S. dollar, lower interest rates, lower commodity prices, and lower inflation, we are likely to get the exact opposite just as we have experienced during past U.S. equity bear markets. It always seems different this time but it never is.


Disclosure of current holdings:


From my largest to my smallest position I currently am long GDXJ, 4-week U.S. Treasuries, the TIAA-CREF Traditional Annuity Fund, SIL, XES (many new), ELD, ASHR, FCG (some new), SEA (many new), SCIF (some new), OIH, ASHS, VNM, GDX, bank CDs, money-market funds, GXG, I-Bonds, URA, PAK (some new), SLX (many new), EPOL, EZA, EPHE, LIT, TUR, ARGT, FM, HDGE, ECH, EGPT, MTDR, EWG, EWU, EWI, REMX, EWW, FXF, COPX (many new), JOF, AFK, RSXJ, EWD, EWQ, EWK, GREK, FXB, EWM, CHK, EWN, GOEX, BGEIX, NGE, WOOD (all new), IDX, RGLD, WPM, SAND, and SILJ. I am short a moderate quantity of XLI.


Those who respect the past won't be afraid to repeat it.


I expect the S&P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bottoming pattern occurring with frequent sharp downward spikes perhaps during the final months of 2020 and into the first several months of 2021. During the 2007-2009 bear market, most investors by Labor Day of 2008 still didn't realize that we were in a crushing collapse, and I expect that during the first several months of 2020 most investors will similarly persist in believing that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and most other small- and mid-cap U.S. equity funds have persistently underperformed their large-cap counterparts except before sharp rebounds; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, and 2007-2009. The Nasdaq in 2018-2019 never quite achieved its March 10, 2000 intraday zenith in inflation-adjusted terms and has thus completed a historic long-term double top. A two-thirds loss from its recent zenith would put the S&P 500 near one thousand and I believe that its valuation will become even more depressed; eventual widespread fear over how much further prices will drop is likely to be accompanied by all-time record investor outflows from most U.S. equity index funds and U.S. high-yield corporate bond funds before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all major U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than U.S. equity bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next historic bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.

Tuesday, May 28, 2019

“To succeed as a contrarian you must recognize what the crowd believes, have concrete justification for why the majority is wrong, and have the patience and conviction to stick with what is, by definition, an unpopular bet.” --Whitney Tilson



GOLDILOCKS AND THE THREE BEARS (May 28, 2019): Beginning around the end of 2006 it was common to hear that the U.S. stock market would keep climbing because the U.S. economy was neither too hot nor too cold; it was just right. This was often called the Goldilocks economy on cable TV in honor of the young girl who wanders into a strange home and discovers porridge which is neither too hot nor too cold but just right for her to eat. What the commentators failed to mention was that Goldilocks is followed by three bears: baby bear, mama bear, and papa bear, in that order. That is exactly what we got in 2007-2009, and what also began on August 31, 2018 when the Russell 2000 again led other U.S. equity indices in completing a historic top.


Here is a past update in which I mentioned Goldilocks and the three bears at a very different juncture for global assets:


We experienced baby bear during the final months of 2018. Mama bear probably started around the end of April and the beginning of May 2019.


Investors made all-time record inflows into many U.S. equity index funds near their highest levels of 2018 which were also close to all-time record overvaluations. Although semiconductor shares, the Russell 2000, VIX, and several other reliable indicators warned of trouble ahead, very few investors were prepared for the pullback during the fourth quarter of 2018. Investors then reduced risk very close to the Christmas bottom just in time to miss a powerful intermediate-term rebound. In April 2019 investors once again piled into U.S. equity index funds along with new record inflows into many U.S. high-yield corporate bond funds. In addition to semiconductor shares, the Russell 2000, and VIX once again warning of a likely sharp correction, U.S. housing prices have been dropping in far more neighborhoods than had been the case last summer. It is likely that the total percentage pullbacks during the next several months will exceed the total losses of 20%-30% for U.S. equity indices from their late-summer 2018 highs to their Christmas 2018 lows.


Many global assets are out of synchronization with U.S. equity indices.


Sometimes global assets tend to rise and fall in tandem while other times they behave quite differently. At the end of 2017 and the beginning of 2018 nearly all risk assets rallied together around the world, and then they began to diverge sharply in January 2018 as U.S. equity indices and U.S. high-yield corporate bonds continued to mostly climb while nearly all other worldwide assets experienced sharp losses. This divergence continued as many emerging-market government bonds and gold/silver mining shares bottomed in September 2018 while many other emerging markets completed their 2018 nadirs during October. U.S. assets completed historic topping patterns from late August through early October 2018 and then plummeted choppily through Christmas, with energy shares experiencing especially sharp December losses.


Starting in early January 2019 there was a nearly synchronous global uptrend, and then divergences began again as non-U.S. assets mostly began notable corrections around the beginning of the second quarter. U.S. equities and high-yield corporate bonds either made lower highs in late April through early May 2019 versus their late-summer tops for small- and mid-cap shares, or else they achieved nominally higher highs for large-cap holdings compared with 2018. Most of the 2019 new large-cap highs for U.S. equity indices and funds including the S&P 500 and the Nasdaq exceeded their 2018 peaks by about a half percent which makes them actually lower highs after adjusting for inflation. Currently we have a situation which is somewhat analogous to roughly the middle of October 2018 where U.S. assets have begun downtrends which are still in their early stages, while many emerging-market stocks, bonds, and commodity-related assets have either recently completed important 2019 lows or will soon do so. Several sectors including India, Brazil, rare-earth extraction, and several non-greenback currencies including the Swiss franc have probably already begun significant uptrends.


Long-dated U.S. Treasuries are an example of how many categories of assets aren't behaving according to traditional bull-market scripts.


Long-dated U.S. Treasuries and their funds including TLT often behave quite differently from U.S. equity indices and U.S. high-yield corporate bonds, but TLT has been approaching its 2017 highs with notable heavy net inflows, deteriorating traders' commitments, and 83% bulls at Friday's close for the Daily Sentiment Index. Funds like TLT and ZROZ will likely end up declining along with U.S. equity indices, U.S. high-yield corporate bonds, and U.S. real estate. The U.S. dollar is probably also completing a topping pattern in preparation for a substantial decline during the upcoming nine to fifteen months.


Uptrends for emerging markets will likely prevent papa bear's emerging [pun probably intended] from hibernation, but mama bear is no sweet gal.


The collapsing phase of any U.S. equity bear market is usually postponed until nearly all worldwide risk assets are set to plunge together. A classic example is 2007-2009 when the Russell 2000 completed a double top on June 1 and July 9, 2007, followed by the S&P 500 on October 9, 2007 and the Nasdaq on October 31. Many commodity producers and emerging markets didn't complete their highs for the cycle until May-June 2008 or the summer of 2008 for many energy shares. As long as many emerging-market securities and commodity producers are mostly forming higher lows, U.S. assets can experience periodic sharp losses which will usually be followed by powerful recoveries such as the post-baby-bear rebound from December 26, 2018 through May 1, 2019. Eventually papa bear will arrive and nearly all worldwide assets will experience dramatic percentage losses, but I don't expect this to occur prior to the spring of 2020.


Each of the three bears along with other bear-market pullbacks will be followed by a powerful rebound, especially after the ultimate bear-market nadir, although volatility will remain elevated with especially sharp moves in both directions.


Any U.S. equity bear market is actually a series of corrections, each one of which is followed usually but not always by a sharp rebound, with the most intense pullbacks generally experiencing the most energetic recoveries. Volatility in both directions will remain especially high for an extended period of time particularly when the bear market has either ended or has a few more scary downward spikes remaining before it is finished, since that is when valuations are most compelling and bargains will eventually lead to triple-digit percentage gains. To discourage as many investors as possible into selling instead of buying, all recovery attempts during a bottoming process will be accompanied by frightening corrections, huge down days, and anything else which will cause most people to want to reduce risk instead of increasing it. I remember a friend who had considered buying risk assets many times in late 2008 and early 2009 but couldn't bring herself to do so because there was no calm entry point which appeared to be emotionally safe. When she was finally ready to more seriously invest near the end of March 2009, April 1 ended up being a sudden and severe down day which once again discouraged her from participating.


Outflows for U.S. equity index funds and U.S. high-yield corporate bond funds will probably approach or set new all-time records for net outflows during the bottoming process when papa bear is roaring at full blast. This will likely occur in 2020 and perhaps also in 2021 as U.S. pre- and post-election uncertainty encourages intense emotional buying and selling.


A weakening U.S. dollar is one characteristic feature of the mama-bear portion of a bear market.


Looking back at 2007-2009, the U.S. dollar slid to an all-time low versus many currencies in March 2008 and then completed a vital double bottom mostly at higher lows in July 2008. As long as the greenback remained well above its bottom there was no reason to sell most global assets. Once the U.S. dollar began to surge higher in July 2008 it served as a warning that the clock was ticking for all risk assets. Papa bear began shortly after a brief post-opening-bell ascent on September 2, 2008. The U.S. dollar index reached its high for that cycle on March 4, 2009, two days ahead of the ultimate 666.79 nadir for the S&P 500 Index. It is likely that in the current mama-bear environment we will mostly experience lower highs for the U.S. dollar versus nearly all worldwide currencies until we are experiencing a sharp U.S. equity intermediate-term bounce, at which point the greenback will probably rebound convincingly from multi-year and multi-decade lows as a useful advance warning of the upcoming papa bear. The U.S. dollar tends to be especially robust as a safe haven during papa bear, usually more than completely reversing its mama-bear losses versus most currencies.


VIX has been forming higher lows for 1-1/2 years since late 2017, just as it had previously done starting in late 2006.


In December 2006 VIX dropped below 10 and thereafter formed higher lows. VIX was still relatively depressed in August 2008, trading periodically below 20, but it thereafter soared to a multi-decade top just below 90 in October 2008 before forming numerous lower highs thereafter. VIX is doing the same in recent years, trading on an intraday basis below 9 several times near the end of 2017 and the first two trading days of 2018, then forming progressively higher lows including numerous dips below 15 during the past several trading days. Eventually VIX will peak at its highest point since 2008 or earlier and will thereafter form numerous lower highs prior to U.S. equity indices probably completing their respective bottoms several weeks or months afterward. The relentless sequence of higher VIX lows for 1-1/2 years while still remaining subdued means that mama bear is almost certainly here but so far remains incognito.


Most investors believe that we are still in a Goldilocks economy and won't recognize the three bears until the bitter end.


One reliable characteristic of U.S. equity bear markets is that investors don't believe they really exist until it is far too late to sell at favorable prices. During the 2000-2002 bear market, investors in January 2002 remained confident that the uptrend was still intact, and the same was true during the 2007-2009 bear market as late as Labor Day 2008. Most people can't perceive the existence of baby bear or mama bear and only notice papa bear after a crushing collapse when the overall bear market has already experienced most of its losses and when some leading sectors have already completed their bottoms just as investors are making all-time record net outflows while insiders are aggressively accumulating their own shares. There are many Boglehead devotees which is ironic since John Bogle himself sold heavily near bull-market peaks including 2000 and in 2018 shortly before his passing. These folks are convinced that they should keep buying U.S. equity index funds and U.S. high-yield corporate bond funds no matter how overvalued they are, because they are overconfident that they will have to come out ahead in the long run. This attitude will discourage Bogleheads from selling anywhere near the top but just as with equally committed Nifty Fifty and similar investors from past decades they will eventually unload massively out of disillusionment when we get close to the lowest bottoming prices near the end of papa bear.


U.S. housing prices have been falling in an increasingly widening range of neighborhoods.


Near the end of 2018 there were not many neighborhoods where U.S. housing prices had been dropping on a year-over-year basis, whereas in recent months the total has been climbing sharply with month-over-month losses becoming more common. U.S. housing prices overall are moderately less overvalued than they had been at their all-time 2005-2006 peaks averaging more than twice fair value. However, housing prices reached all-time highs during the past year or two even after adjusting for inflation in many central urban neighborhoods. Down payments remain essentially zero so that a moderate decline will leave many homeowners underwater and reluctant to pay their mortgages which will lead to another round of widespread defaults. A repeat of the 2006-2011 bear market, in which the average U.S. house lost 34% of its value (not adjusting for inflation), is likely to occur during the next four years or so with greater percentage pullbacks generally prevailing in the most overvalued regions. As compared with a historic average of 3:1 for housing prices relative to average household incomes, and bargain ratios of 1.5:1 in many parts of Arizona, Florida, and Nevada during 2010-2012, there are numerous neighborhoods in San Francisco, Los Angeles, Seattle, Portland, Vancouver, and elsewhere which sport ratios of 9:1 or even 10:1 and are thus roughly triple fair value.


Cryptocurrencies' 2019 surge confirms that investors remain eager to chase as is characteristic of a post-baby-bear rebound.


Investors become dangerous complacent following a lengthy bull market, and the bull market for U.S. equity indices which began in early March 2009 certainly fits all criteria of having been absurdly overextended. Just as with Beanie Babies in the 1990s, cryptocurrencies were late to the bull-market party but caught up with ultra-trendy action until December 2017. They thereafter acted as all bubbles inevitably do: they plummeted over 80% and then rallied strongly after Christmas 2018. Cryptocurrencies have once again become trendy and were even featured in a recent episode of "60 Minutes" highlighting a fellow who went from rags (almost nothing) to amazing riches to rags (washing dishes) to riches--and will surely go to rags yet another time. His lavishly leveraged lifestyle is typical of people who are about to suffer serious losses. The South Sea Trading Company followed a nearly identical chart pattern three centuries ago--spoiler alert: it collapsed horribly in its final months.


Semiconductor shares and their funds continue to give a valuable foreshadowing of both uptrends and downtrends.


SMH, a fund of semiconductor shares, had peaked on July 17, 2007 at 41.41--almost three months before the S&P 500 did likewise on October 9, 2007. SMH similarly gave advance notice of the subsequent bull market by completing its bottom for the cycle on November 21, 2008 at 14.45; the S&P 500 didn't complete its historic nadir of 666.79 until March 6, 2009 which was 3-1/2 months later. This pattern has continued in modern times with SMH topping out in March 2018 with lower highs in June 2018 and afterward while the S&P 500 didn't reach its highest point until September 21, 2018. This year, SMH rose to an all-time zenith shortly after the opening bell on April 24, 2019, several trading days ahead of the S&P 500's May 1, 2019 top. Whenever we are in the papa-bear phase of the current bear market it is probable that SMH will bottom by an indefinite period of time prior to most U.S. equity indices. As of the close on Friday, May 24, 2019, SMH had fallen over 17% while SOXX was down 18% relative to their April 24, 2019 intraday zeniths.


Small- and mid-cap U.S. equity baskets never got anywhere near their 2018 all-time highs during 2019.


One classic divergence from history is whenever smaller U.S. companies are underperforming their large-cap counterparts. In 1929 this became an increasingly notable development which led to the worst bear market in U.S. history, and in 1972 a similar growing divergence between smaller and larger U.S. socks presaged the worst post-Great Depression bear market of the 20th century. In 2007, most baskets of smaller companies peaked relatively early in the year, such as the June 1/July 9 double top for the Russell 2000, versus the S&P 500, the Nasdaq, and other large-cap indices which mostly didn't peak until the fourth quarter of 2007 and in some cases around the opening bell on Christmas Eve. It is probably not a coincidence that most baskets of small- and mid-cap U.S. companies including the Russell 2000, the S&P SmallCap 600, and related baskets had peaked on or near August 31, 2018 and didn't get anywhere close to those levels thereafter, even at the highest points of 2019. By diverging negatively from the S&P 500 and the Nasdaq, this common pattern from past U.S. equity bear markets has been repeated.


The relatively few investors who have noted this behavior have mostly concluded that for one reason or another "it's different this time" or have recommended shifting from smaller to larger U.S. companies rather than selling.


Gold/silver mining, energy, and numerous emerging-market funds will likely be among the biggest winners in the upcoming year, while the most overvalued U.S. equity and high-yield bond funds will be among the most notable losers.


GDXJ (mid-cap gold/silver mining) is likely completing important higher lows along with other gold mining and silver mining shares, while XES (oil and gas equipment and services) remains among my favorite energy funds with a ten-year high in the purchases of its components by top corporate insiders in December 2018 and recent additional insider buying at modestly higher lows. Many emerging-market and commodity-related funds have suffered substantial net outflows with GDXJ setting a new all-time record. Among other emerging markets, funds of Chinese A-shares including ASHR (A-share large-cap), ASHS (A-share small-cap), and KBA (A-share diversified) are especially worthwhile with negative media headlines obscuring unusually cheap valuations with high-single-digit price-earnings ratios. Other compelling emerging-market funds include TUR (Turkey), PAK (Pakistan), GXG (Colombia), and EPOL (Poland). SCIF (small-cap India) had been a worthwhile bargain although it has been climbing as election results in India were being tabulated. TUR as of its close on May 23, 2019 sported a price-earnings ratio of 5.64 and a price-to-book ratio of 0.92.


Most U.S. technology shares and U.S. high-yield corporate bonds are unusually overpriced even compared with previous bull-market peaks. One common characteristic of U.S. equity bear markets is that high-P/E shares usually end up with dramatic losses not because of falling earnings but due primarily to compressing price-earnings ratios.


Inflationary expectations have become nearly extinct with a recent Bloomberg Businessweek cover asking "Is Inflation Dead?"


Inflationary fears had become almost nonexistent in 2007 which had almost completely reversed during the first several months of 2008. Inflation was also a serious concern in 2000, 1972, 1929, and during the early stages of nearly all major U.S. equity bear markets. Mama bear tends to feature rising wage and price inflation and we are just beginning to see some pressure on the wage front with hardly any price worries so far. This is likely to change considerably between now and the early months of 2020 as inflationary fears become far more prevalent.


Buying U.S. equity index funds and U.S. high-yield corporate bonds today is like trying to reach the top of Mount Everest at the same time as everyone else.


Some people recently died climbing Mount Everest--mainly because they became a dangerously overcrowded herd. Here is an actual photo of Everest Bogleheads which seems unbelievable:


The bottom line: Goldilocks is always followed by three bears, both in the children's story and when investing. We adored baby bear in the fourth quarter of 2018. Mama bear likely arrived at the beginning of May 2019.


U.S. equity bear markets are far more alike than U.S. equity bull markets. One common characteristic is the existence of three bearish phases, of which baby bear ended shortly after the opening bell on December 26, 2018 while mama bear probably emerged from hibernation shortly after the opening bell on May 1, 2019. Many investors believe that U.S. equity indices are still in bull markets, but the behavior of the Russell 2000 in 2018-2019 and the failure of nearly all U.S. equity indices in 2019 to surpass their 2018 peaks after adjusting for inflation makes it probable that we are already nearly nine months into the current U.S. equity bear market. Mama bear tends to be accompanied by outsized losses for previous top investor favorites along with a generally retreating U.S. dollar versus most global currencies. Inflationary expectations tend to climb when mama bear is present. Emerging-market stocks and bonds, along with commodity-related assets, are often among the top performers until the U.S. dollar finally terminates its downtrend and begins a strong upward surge which heralds the eventual arrival of papa bear. Most likely we are at least several months away from observing the ursine father.


Disclosure of current holdings:


Besides 4-week U.S. Treasuries which I purchase every week, I own numerous exchange-traded and closed-end funds which are listed below. I frequently update my outlook and asset allocation on SeekingAlpha.com.


From my largest to my smallest position I currently am long GDXJ (some new), 4-week U.S. Treasuries (some Thursday, May 23, 2019 yielding 2.378%), the TIAA-CREF Traditional Annuity Fund, SIL, SCIF, ELD, ASHR, XES (some new), SEA (some new), OIH, FCG, ASHS, VNM, GDX, bank CDs, money-market funds, GXG (some new), URA, I-Bonds, PAK, EPOL, EZA, EPHE, SLX (some new), LIT (some new), TUR (some new), ARGT, FM, ECH, EGPT, MTDR, EWG, EWU, EWI, EWW, REMX, FXF, JOF, AFK, RSXJ, COPX, EWD, EWQ, EWK, GREK, HDGE, EWM, CHK, EWN, GOEX, BGEIX, NGE, IDX, RGLD, WPM, SAND, and SILJ. I have no current short positions.


Those who respect the past won't be afraid to repeat it.


I expect the S&P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market bottoming pattern occurring with frequent sharp downward spikes during the final months of 2020 and perhaps into 2021. During the 2007-2009 bear market, most investors by Labor Day of 2008 still didn't realize that we were in a crushing collapse, and I expect that as late as the winter or spring of 2020 most investors will similarly persist in believing that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and most other small- and mid-cap U.S. equity funds have generally underperformed their large-cap counterparts; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, and 2007-2009. Both the S&P 500 and the Nasdaq surpassed their 2018 peaks in 2019 but only by a half percent each, thereby making lower highs after adjusting for inflation. The Nasdaq in 2018-2019 never surpassed its March 10, 2000 intraday zenith in inflation-adjusted terms and has thus completed a historic long-term double top. A two-thirds loss from its recent zenith would put the S&P 500 just below 985 and I believe that its valuation will become even more depressed; fear over how much further prices will drop is likely to be accompanied by all-time record investor outflows from most U.S. equity index funds and U.S. high-yield corporate bond funds before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next major bear-market bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.

Sunday, March 24, 2019

“The intelligent investor is a realist who sells to optimists and buys from pessimists.” --Benjamin Graham



REACT TO OVERREACTIONS (March 24, 2019): Bear markets for U.S. equities, including the one which began on August 31, 2018 for the Russell 2000, feature repeated market overreactions which occur much more rapidly and consistently than in bull markets. Investors will become increasingly confused as to what is happening and will repeatedly believe one foolish myth after another. In October 2018 most analysts insisted that we were merely experiencing a brief correction and that supposedly we were still in a U.S. equity bull market. Around Christmas the drops of more than 20% for the S&P 500 and the Nasdaq convinced almost everyone that we were in a bear market from which a short-term rebound was supposedly impossible. Naturally we experienced a huge short-term recovery--after which almost everyone became convinced once again that we must be in a bull market after all. Many investors falsely celebrated the phony ten-year anniversary of the U.S. equity bear market earlier this month. A misguided Fed and an inverted U.S. Treasury yield curve have suddenly made it popular to declare that a global recession is imminent. Long-dated U.S. Treasuries which were hated when they were true bargains less than five months ago near important lows are now being eagerly chased at inflated prices. Why does the consensus keep changing and why is it always wrong?


U.S. equity bear markets are far more alike than U.S. equity bull markets, but hardly anyone pays attention to their most typical patterns.


Imagine if each winter people had totally forgotten that they wore heavy clothing and owned snow shovels the previous winter. They would end up feeling cold from wearing thin shirts and short pants and never realizing that winter reoccurs each year with nearly identical behavior. Oddly enough, investors in 2018 aren't looking back to 2000-2002 or 2007-2009 or 1972-1974 and concluding that we are in a similar pattern. Instead, they are convinced that it must be completely different this time and that there is nothing to be learned from the past. There are many common features of U.S. equity bear markets, one being that bear markets aren't acknowledged until they experience their collapsing phases--which are usually far into the bear market after it has already existed for one or two years. The Russell 2000 reached its all-time top on August 31, 2018, experienced a drop of 27.3% from 1742.09 to 1266.92, and then rebounded to a February 25, 2019 recovery high of 1602.10 before once again forming lower highs. Whenever the Russell 2000 forms lower highs while the S&P 500 is making higher highs, this is usually a warning that a more severe drop is approaching. However, because investors have concluded that 2018 is nothing like 2000 or 2007 or 1973, they didn't observe this obvious parallel.


Like nearly all assets, long-dated U.S. Treasuries were hated when they were compelling buys a year ago and now they are suddenly beloved as they are once again becoming dangerously overpriced.


When I was purchasing TLT near its lows of 2018, nearly everyone was convinced that long-term U.S. interest rates had to move higher because the Republican tax cuts combined with increased government spending supposedly meant lower taxes and higher spending and sharply increasing deficits--therefore meaning that the government would have to pay higher interest rates to borrowers. Ironically, the biggest U.S. monthly deficit occurred during the past month when U.S. long-term interest rates experienced one of their sharpest percentage decreases in history. This shows first of all that analysts have no idea what they are talking about, and secondly that there isn't a simple interrelationship between deficits and interest rates. It also means that when everyone is telling you that interest rates will keep moving higher then they are likely set to drop substantially, whereas when everyone is expecting lower rates--like right now--they are probably set to soon move sharply higher over the next year or so.


Sometimes an apple is simply an apple.


If you see a woman holding an apple in her hand, what does it mean? Maybe it means that she symbolizes the birth of all existence. Perhaps it means that she has eaten from the tree of knowledge which she will share with Adam. Perhaps it means that life is inherently cyclical. Or, maybe it just means that she wants to eat an apple. I prefer the latter explanation.


An inverted U.S. Treasury yield curve could simply mean that the 28-day U.S. Treasury is paying too much, while the 30-year U.S. Treasury is paying too little.


The U.S. Treasury yield curve can always be found at the following official U.S. government web site:

What is the significance of the yield on the 28-day U.S. Treasury being 2.49%, while the 10-year U.S. Treasury's annualized yield is 2.44%?


Simplicity trumps brilliance.


Many analysts are stating that the inverted U.S. Treasury curve means that we will experience an imminent U.S. recession. Others see it as a symptom of massive global change which is visible in everything from increased flooding worldwide to more frequent market fluctuations.


While Armageddon is fun to talk about, here's a simpler explanation: short-term U.S. Treasuries are paying too much and you should invest in them. Long-term U.S. Treasuries are paying too little and you should avoid them. Yes, that's far too easily understandable to be fabulously mystical and holistic, but it is common sense--which as usual is none too common.


There is a typical bear-market shift out of wildly overpriced U.S. assets into bargain non-U.S. assets.


By all fundamental measures U.S. assets in nearly every broad-based asset class including general equity indices, technology shares, and high-yield corporate bonds are far too expensive compared with their counterparts in the rest of the world. Since the last week of October 2018, investors have been progressively shifting out of U.S. assets into non-U.S. stocks--especially into emerging-market securities and the shares of commodity-related assets. This shift hasn't received nearly as much media attention as many other financial events during the past five months but that doesn't mean that it wasn't of equal or greater importance. Emerging-market shares and commodity producers have achieved approximately double the returns of U.S. equity indices since late October with generally less volatility. A powerful uptrend isn't less significant just because it isn't widely known by most U.S. investors. As with all market developments, the most experienced and wealthiest investors are the first to recognize any trend change and to adjust their portfolios accordingly, gradually moving to the least-experienced investors who are desperately trying to figure out what to do with their 401(k) plans. By the time any idea becomes widely known it is far too late to capitalize upon it.


Gold mining and silver mining shares have been quietly rebounding since they had slid to 2-1/2-year bottoms on September 11, 2018 more than a half year ago.


Hardly anyone realizes that two of the biggest net outflows out of all exchange-traded funds in calendar year 2019 have been GDX and GDXJ. The first is a fund of large-cap gold mining and silver mining shares, while the second is in the same industry but is concentrated in mid-cap shares. The total outflow for GDXJ has been approximately one-seventh of its entire market capitalization. Most investors have already forgotten or didn't realize that U.S. equity index funds mostly continued to experience net outflows not only during late 2008 and early 2009 when they were collapsing but all the way through the end of 2012. Investors didn't want to participate in the early years of the lengthy U.S. equity bull market when prices were experiencing their best bargains. This is due to several reasons: 1) the 2007-2009 collapse was fresh and painful in investors' minds through 2012; 2) when U.S. assets were truly compelling they were also highly volatile as deeply underpriced assets almost always are, thereby frightening away nervous investors; 3) since the media kept telling them that the recovery was unsustainable, investors hesitated more than they acted. The most money flowed into stocks in 2018-2019 when prices were near their highest levels in history. Whether they realize it or not, investors keep buying high and selling low and repeating this process over and over again.


Emerging-market stocks and bonds remain worthwhile, while many commodity producers have been quietly rebounding but are still compelling for purchase.


Emerging-market funds including TUR, PAK, SCIF, and EPOL are hardly known to most investors but they represent some of the best values available in the world. SEA is a fund of sea shipping shares which also is not widely discussed but has deep bargain fundamentals. Commodity producers including LIT, REMX, GDXJ, SIL, SILJ, and XES have been rallying in recent months with periodic sharp corrections. All of the above will probably be among the top-performing exchange-traded funds into early 2020.


If everyone is worried about anything then you don't have to be concerned with it. If almost no one is worried then you should be.


Think about all the top concerns which investors have been fretting about during the past half year: tariffs, a Chinese slowdown, Brexit, Fed rate hikes, and recently the flattening U.S. Treasury curve. How many of these actually changed the fundamental situation? So far, none--and the inverting U.S. Treasury curve will prove to be equally groundless. Sure, we will eventually have a recession as is inevitable since the previous one had ended nearly a decade ago, but it won't happen soon with everyone talking about it.


Here are legitimate worries which no one is concerned with: a falling U.S. dollar, rising U.S. inflation, overheating global economies including China, falling housing prices, increasing defaults, and rising interest rates.


You will hardly see anyone being concerned with sharp increases in defaults, interest rates, and inflation, and yet those are far more serious concerns during the upcoming year than tariffs, a Chinese slowdown, or the inverted U.S. Treasury curve. We are at that stage of the U.S. equity bear market where historically we are most likely to experience increasing defaults in mortgages and high-yield corporate bonds and other loan agreements, while inflation and interest rates stage surprise increases when everyone is gazing lower. During the bear markets of 2007-2009, 2000-2002, and 1972-1974, investors went from almost zero fear of these events to becoming wildly obsessed with them. High-yield corporate bonds in particular, which sport near-record narrow spreads relative to U.S. Treasury yields, will likely suffer much wider spreads as lenders become increasingly reluctant at the same time that borrowers are desperately trying to lock in low yields. Investors, analysts, and the Fed are nearly unanimous in anticipating too low a rate of inflation in the United States. It has been a long time since we have experienced stagflation--a combination of slowing U.S. growth and rising U.S. inflation--but that would be par for the course at this stage in the U.S. equity bear market now that it has existed for nearly seven months.


The bottom line: as has been the best advice since the U.S. equity bear market began in late August 2018, prepare for what has happened most frequently at this stage in previous U.S. equity bear markets.


Instead of expecting 2019 to be completely different from the past, you should anticipate it to be a nearly exact repeat of what has happened at this stage during past U.S. equity bear markets through the decades. Emerging-market securities and commodity producers will likely continue to be among the top performers as they have already been since the last week of October 2018. Investors will be shocked, shocked as the past repeats itself and we experience a combination of a falling U.S. dollar, rising corporate and mortgage defaults, falling housing prices, rising U.S. inflation, and an acceleration in the underperformance of U.S. assets compared with their counterparts in the rest of the world. Fade the inverted-yield-curve blather by purchasing the high-paying 28-day U.S. Treasuries yielding nearly 2.5% while avoiding long-term U.S. Treasuries which are currently paying far too little for the interest-rate risk involved.


Disclosure of current holdings:


I have sold all of my TLT and related long-term U.S. Treasury holdings and used most of the money to buy short-term (28-day) U.S. Treasuries yielding roughly 2.5% along with selected emerging-market equities and commodity producers. You can find my more frequent comments on SeekingAlpha.com and in other media web sites.


From my largest to my smallest position I currently am long GDXJ (some new near 31), short-term U.S. Treasuries (many new), the TIAA-CREF Traditional Annuity Fund, SIL, SCIF (many last month), ELD, ASHR, OIH, FCG, XES, ASHS, VNM, SEA (some new), GDX, bank CDs (some new), money-market funds (some new), GXG, URA (some new), I-Bonds, EPOL (some new), PAK (some new), EZA, EPHE, ARGT, FM, SLX, ECH, LIT (some new), TUR (some new), EGPT, MTDR, EWG, EWU, EWI, EWW, JOF, AFK, REMX, FXF, RSXJ, COPX, EWD, EWQ, EWK, GREK, EWM, CHK, EWN, GOEX, BGEIX, IDX, NGE, RGLD, WPM, SAND, and SILJ. I have no current short positions.


Those who respect the past won't be afraid to repeat it.


I expect the S&P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market nadir occurring maybe in 2020 or early 2021. During the 2007-2009 bear market, most investors in August 2008 still didn't realize that we were in a crushing collapse, and I expect that into early 2020 most investors similarly will think that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and related funds including IWM have generally underperformed their larger-cap counterparts including not surpassing their more recent lower highs of February 25, 2019; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, and 2007-2009. Meanwhile, the Nasdaq climbed to an all-time peak in nominal terms on August 30, 2018--although the Nasdaq never surpassed its March 10, 2000 intraday zenith in inflation-adjusted terms and perhaps never will. A two-thirds loss from its recent zenith would put the S&P 500 near 980 and I believe that its valuation will become even more depressed to create all-time record investor outflows before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next major bear-market bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.

Monday, November 26, 2018

“Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen.” --Seth Klarman



BULLISH HORNS ARE HONKING (November 26, 2018): One common characteristic of a bear market for U.S. equities is that it requires roughly two years for the Russell 2000 to go from its top to its bottom. Along the way investors will become progressively discouraged by recent extended losses and will become gloomiest prior to each powerful bear-market rally. Bear-market rebounds tend to be more intense and rapid than bull-market uptrends and are more clearly signaled by reliable indicators, and thus often provide superior investing opportunities with higher annualized gains and lower downside risk on the long side than bull markets do. This fact is underappreciated by most investors.


The sequence in which assets complete their respective bottoms is well established but is not often used as a guide, partly since investors seem emotionally reluctant to admit that we are in a bear market and to use the proven experience of past bear markets as the most reliable guide to making money in the current bear market.


The recent progression of higher lows and lower lows is typical of an intermediate-term bottoming process.


There are two major kinds of bottoming patterns during bear markets: 1) intermediate-term bottoms that demonstrate similar behavior to each other and which are almost always followed by dramatic recoveries for certain securities; and 2) the final bottoming process which behaves very differently with huge short-term percentage losses and which is followed by a much choppier and shakier recovery that denotes the beginning of the next major bull market. The bottoming pattern we have been experiencing during the past several weeks clearly fits into the first category. It is thus worth examining in detail and analyzing as to the most likely follow-up pattern.


The securities I had recommended for purchase in my previous update have mostly rebounded even when U.S. equity indices were continuing to slide lower.


Emerging-market equity funds from those countries which tend to bottom earliest in the current cycle, including EZA, SCIF, EPHE, ARGT, and ASHR, have already climbed since my previous posting on the morning of October 30, 2018. Most of these had bottomed around the middle of October and then began quietly forming higher lows during the final days of October when most U.S. and some other equity indices continued to make lower lows. The total percentage declines from their peaks of January 2018 had approached one-third of their peak valuations and for SCIF had dropped by nearly half. While these and closely-correlated emerging-market assets have been forming higher lows, other sectors including many western European stock markets and energy shares continued to drop toward or below multi-year lows during November. Meanwhile, gold mining and silver mining shares had been in bull markets for even longer periods of time mostly dating back to 2-1/2-year bottoms which had been completed on September 11, 2018.


Emerging-market government bonds had also bottomed near September 11, 2018 and have mostly formed several higher lows since then, as you can see from charts of funds including ELD and LEMB. However, only a few emerging-market countries completed bottoms for their stock markets more than two months ago including Brazil (EWZ) and Turkey (TUR).


Some equity bourses have continued to lag and several of them represent worthwhile bargains.


Possibly due to above-average negative media coverage of the caravan in Mexico, along with political uncertainty, equity valuations in that country and its exchange-traded fund EWW have fallen to lower lows today while an increasing number of emerging-market equity funds have been forming higher lows. GXG and ICOL, both funds of Colombian shares, have also been lagging in forming higher lows.


When investing there is an important tug-of-war between buying those assets which have already been forming higher lows versus those which are still making lower lows. In general a combination of these is ideal, but finding the proper balance is challenging. By making small commitments for each individual trade you will have the flexibility to continue to gradually accumulate both kinds of securities during a bottoming process.


Investors have been unusually fearful by many established measures.


Daily Sentiment Index for several decades has surveyed futures traders regarding their opinion about the upcoming behavior of numerous futures contracts. As of the close on Tuesday, November 20, 2018, a surprising number of readings were near multi-year or multi-decade extremes. Only 8% of traders were bullish toward both the S&P 500 Index and the Nasdaq Composite, while 8% were also bullish toward gasoline. 9% of futures traders were bullish toward crude oil and heating oil, and 10% were bullish toward the CRB Index of commodities. 10% of traders were bullish toward the British pound, no doubt negatively influenced by Brexit uncertainty. A slightly larger 12% were bullish toward the Nikkei in Japan, while 20% were bullish toward both gold and silver. 84% were bullish toward VIX which tends to peak whenever fear is highest about the possibility of a U.S. equity bear market becoming more severe. 81% of futures traders were bullish toward the U.S. dollar index.


The above readings have generally become less extreme since November 20 while remaining far from their typical levels.


Other measures of sentiment have been sending similar signals.


A recent article on Seeking Alpha observed that gloom toward U.S. equities has approached multi-year extremes:


Western European shares took longer to complete their bottoming patterns.


While most emerging-market bourses had completed their bottoming patterns during the final trading days of October 2018, western European shares primarily did so two or three weeks later. There have been unusually extended pullbacks from their January 2018 tops for nearly all countries in Western Europe, with especially large losses for EWG (Germany), EWI (Italy), and EWU (the United Kingdom). In all cases these losses had almost nothing to do with lower potential corporate profits and almost everything to do with geopolitics. It is usually most profitable to buy whenever political wrangling and scandals dominate investors' outlook rather than economic reality. Angela Merkel's decision not to stand for re-election in Germany, uncertainty concerning Italy's relationship with the EU, and the Brexit infighting in the U.K. have all made widely-broadcast headlines but are unlikely to meaningfully impact the profits of companies in these countries. I therefore purchased all of these in November. Other countries were also lagging in their bottoming processes including Vietnam (VNM) which is often overlooked by many investors even if they otherwise favor Asian equities.


Energy shares, as is typical, have been among the slowest sectors to complete their bottoming patterns.


The rotational pattern tends to be similar during both topping and bottoming patterns. For example, in 2007 the Russell 2000 completed a double top on June 1 and July 9. Most gold/silver mining shares completed their highs in the middle of March 2008, while emerging-market equities did likewise in May-June 2008 and energy shares were the most lagging sector to top out during June-August 2008. Many energy funds including OIH and FCG slid toward multi-year lows during the past week when I was gradually accumulating them. OIH in particular has fallen sharply from its January 2018 zenith, and even that top wasn't anywhere near its much higher peak from the middle of 2014.


Even though the same patterns keep repeating themselves through the decades, investors are always convinced that it's different this time.


Currencies have been sending a similarly bullish signal regarding global equities.


Very few investors realize or appreciate that most emerging-market currencies completed their bottoming patterns versus the U.S. dollar somewhere around the middle of October and have since formed several higher lows. Most European currencies have taken longer to complete their respective intermediate-term bottoms but have mostly done so during the past few weeks. One notable bargain has been the Swiss franc which during the past decade has rarely traded at a price below the U.S. dollar, but which fell as low as .987987 U.S. dollars in November 2018 before once again barely regaining parity.


VIX keeps making lower highs which is historically very bullish for global equities.


One of the earliest signals that global equities were set for strong rallies was when VIX in November 2008 didn't surpass its peak from October 2008. Similar behavior has been occurring in recent weeks as VIX soared to 28.84 on October 11, 2018 and then completed a lower high of 27.86 on October 29, 2018 when most U.S. equity indices made lower lows. On the following day, October 30, 2018, VIX climbed as high as 25.55 and then registered an additional lower high of 23.81 on November 20, 2018. These lower highs almost all represent essential buying opportunities for equity funds. The most recent lower high for VIX was 22.65 on Friday, November 23, 2018.


The relative behavior of IWM vs. SPY is especially useful in determining key turning points for U.S. equity indices.


I believe that U.S. equity indices are especially overvalued relative to most global equities and thus I am not planning to purchase them until they complete major bottoms perhaps in 2020. However, they send useful signals for stock markets worldwide since the world is so closely interconnected. Whenever the Russell 2000 and its funds including IWM are notably underperforming the S&P 500 and its funds including SPY and VOO then it is likely that any downtrend will continue; as soon as this pattern reverses then a rebound is closely approaching. After topping out at an all-time zenith on August 31, 2018, IWM made several lower highs while SPY was still making higher highs for three weeks. Then, after bottoming on October 26, 2018, IWM has been forming higher lows more frequently than SPY. Whenever IWM begins to persistently underperform SPY again, which will likely occur during the first half of 2019, it will likely be signaling the next intermediate-term downtrend for U.S. equities.


Too many investors are obsessed with their opening prices which should be completely irrelevant when making trading decisions.


Most people are illogically concerned about their opening prices or their personal history with a given asset when deciding whether or not to trade it. All that should matter is its future behavior. The past is a useful guide to its behavioral pattern but your personal history should be completely ignored. Far too many people won't sell because something is at a loss, thereby inviting much larger future losses. Others don't want to raise their average purchase price and thus miss out on ideal opportunities to buy at higher lows. I have been intentionally accumulating more EZA each time it drops to 49.99 regardless of the fact that my original purchases had all been at lower prices.


Investors also obsess about "why" such-and-such has moved higher or lower recently or what is "really going on" with a particular security.


If you are looking for anything then you will find it one way or another. If you are looking for reasons why Chinese or Indian equities have dropped over one-third from their January 2018 peaks then you will end up concluding that it has something to do with Chinese tariffs or the 2019 Indian elections and you will wrongly conclude that you shouldn't buy. When investors have reasons to sell near multi-year or multi-decade lows then they will be far more likely to do so because we like to think that we do everything for a reason. Investors repeatedly overreact to supposedly negative news which rarely has any impact on corporate profits. Investors often sell when a currency has become depressed due to political reasons, as for many emerging-market currencies and the U.K. in recent months.


A depressed currency stimulates exports and reduces local wages and thus increases rather than decreases total profits.


The bottom line: as is usually the case, investors have been reducing risk when they should be substantially increasing it.


Investors were most excited about owning U.S. equities in the late summer when they should have been aggressively selling, and recently they have been selling stocks worldwide and thus registering all-time record outflows from many emerging-market and commodity-related funds. At the same time, the ratio of insider buying to insider selling for sectors including energy has set or approached multi-year highs. Investors tend to overestimate future gains at market peaks and to even more irrationally underestimate gains just before large percentage increases are maximally likely to occur. Many of the funds I have purchased, all of which are listed below in my disclosure, could gain 30% or 40% over the next half year alone and could continue to climb perhaps as late as the beginning of 2020 depending upon how aggressively they rebound and how trendy they become in 2019.


Disclosure of current holdings:


Due to all-time record outflows and rare extremes of fear, I have completed the closing of all of my short positions while progressively and gradually buying into both higher lows and lower lows for emerging-market, energy, and related sectors including sea shipping. During the past two weeks I have been emphasizing ASHR (Shanghai A-shares), OIH (oil services), EPOL (Poland), VNM (Vietnam), EWG (Germany), EWU (U.K.), EWI (Italy), FCG (natural gas production), SEA (sea shipping), EZA (South Africa), FM (frontier markets), and EWW (Mexico) which I purchased this afternoon. I am also buying a little GDXJ each time it drops below 27. I sold VGPMX since Vanguard seems to be clueless about buying low and selling high.


Funds I am considering for purchase during the remainder of 2018 include ASHS (Shanghai small-caps), GREK (Greece), PAK (Pakistan), COPX (copper producers), RSXJ (Russian small-caps), EGPT (Egypt), AFK (Africa), Indonesia (IDX), GXG (Colombia), ECH (Chile), EWK (Belgium), and EWY (South Korea).


From my largest to my smallest position, I currently am long GDXJ (some new), the TIAA-CREF Traditional Annuity Fund, TLT, SIL, ELD, GDX, URA, I-Bonds, bank CDs (some new), money-market funds (some new), EZA (some new), SCIF, ASHR (some new), OIH (many new), SEA (some new), EPHE, EPOL (many new), ARGT (some new), VNM (all new), FCG (some new), EWG (all new), EWU (all new), EWI (all new), EWW (all new), GOEX, BGEIX, MTDR (all new), RGLD, WPM, SAND, and SILJ. I have no current short positions.


Those who respect the past won't be afraid to repeat it.


I expect the S&P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bear-market nadir occurring maybe in 2020. During the 2007-2009 bear market, most investors in August 2008 still didn't realize that we were in a crushing collapse, and I expect that well into 2019 most investors similarly will think that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and related funds including IWM generally underperformed their larger-cap counterparts into late October 2018; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, and 2007-2009. Meanwhile, the Nasdaq climbed to an all-time peak in nominal terms on August 30, 2018--although the Nasdaq never surpassed its March 10, 2000 intraday zenith in inflation-adjusted terms and perhaps never will. There is also a little-known megaphone formation in which the S&P 500 has been making higher highs and lower lows since 1996. A two-thirds loss from its recent zenith would put the S&P 500 near 980 and I believe that its valuation will become even more depressed to create all-time record investor outflows before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits; the incredibly long bull market has left them completely unprepared for a bear market. Die-hard Bogleheads will probably resist unloading perhaps until late 2019 or early 2020, but when they are perceived to be blockheads and become disillusioned by their method they will be among the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value they will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect.


Recent extreme fear combined with additional lower highs for VIX are both likely signaling an intermediate-term rebound for some unknown period of months into 2019. I therefore progressively closed all of my short positions and have been gradually purchasing the most undervalued shares which are primarily emerging-market and commodity-related securities.


Investors should be buying global stocks now not because we are allegedly still in a bull market--which we are not--but because we are in a bear market where the most reliable rebounds occur with significant annualized gains and limited potential downside as long as fear remains elevated.


I appreciate Seeking Alpha reprinting these updates.


All of my updates are posted originally on my blog at truecontrarian.com and are then reprinted by Seeking Alpha which has a nicely-moderated forum for making comments. If you want to see my ideas as close as possible to when I am writing them then be sure to go to my web site first because it will take time for Seeking Alpha to be able to properly reformat them for publication.