BOOM, BUST, BOOM, BUST BUST

There are not many “advantages” to getting old. Experience, hopefully. Wisdom, possibly. Occasional big drops in one’s stock portfolio, definitely.

As I said in the November 2017 Desert of the Real Economics Investment Newsletter, not even a lone trapper in Alaska could not have heard the news that American stock markets are at record highs, and pushing again through prior record highs. And what comes with record highs in the value of houses, tulip bulbs, gladiola corms or stocks? Record busts. The Author Rob has seen a few. The October 1987 Market Crash, the 2000 dotcom Bubble, and the Housing Collapse of 2008 (which was almost an economic collapse).

Could the next market crash be lurking afore? Could there be a 1-2 punch? Let’s take a look at two graphs. 

 

IS THIS CRAP GOING TO BE ON THE TEST?

The first chart provides the level of student debt in the US. From 2006 to 2016 it increased from 200 billion a little over a trillion. Some analysts warn of an impending repayment crisis. Student debt is currently the second highest type of debt we have in the country, behind only mortgage debt, and greater than either credit card debt or auto loans. (1)

Nationwide, the average student loan debt is $4, 920. However, averages rarely tell the whole story. About nine million student borrowers have less than the average amount. But 12.4 million student borrowers have debt of an amount between $10,000 and $25,000. More than one million students have debt between $100,000 and $150.000.

“The rate of borrowers who are in default or more than 90 days past due is approaching 40%. However, the average student loan balance for students in default is only $16,381 according to a recent report by Demos, virtually identical to the $15,654 balance for people paying on their student loans.”(2)

Student loan debt is generally not dischargeable in bankruptcy. However, the debt is not collateralized (Loan sharks collateralize their borrowers, however) and the repo man cannot come out and haul in the debtor. The wages or property of the borrowers can be garnished, but most of them have little to no property. Wage garnishments can get repayment, but long periods of time are required for wage garnishment to pay off a debt.  And because many debtors change jobs frequently, there are substantial delays in transferring garnishment orders to their new employers.

YOU CAN’T PAY YOU LOAN, YOU SAY. WELL, We’ll JUST MAKE DAMN SURE YOU CANNOT PAY BACK YOUR LOAN. IT IS LIKE SOMEONE KNOCKING YOUR TEETH OUT AND THEN REPROACH YOU WHEN YOU MUMBLE (3)       

Nineteen states can revoke a borrower’s professional license if they are in default on student loans. Three cesspools, Iowa, South Dakota, and Kentucky, can even revoke a borrower’s driver’s license. Remember, these are loans by the federal government, not the respective states. There are situations where licensed student loan borrowers refuse payment when they could legitimately pay. But in these cases, judgments against the debtor and wage garnishments would obtain payment. But in cases where the professional, such as a nurse, lawyer, firefighter will lose their ability to work (and repay) because their license is revoked, these laws reach absurd results and can trigger complete financial collapse for a person.

ASSET BUBBLES, MUSICAL CHAIRS AND DUCKING IN TIME (4)

The Author Rob remembers the dot.com run-up and fall-down. The Internet had hit critical user mass, consumers gained more bandwidth, and venture capitalists and young entrepreneurs were monetizing anything that they could. Startups were everywhere and established technology firms saw their stocks surge.  Money came in by the containership. The NASDAQ reached 5048 on March 10, 2000(5). Panic selling set in and we know the rest of the story.

As the second chart demonstrates, At the height of the dot.com bubble, the stock market capitalization was 143% of GDP. Stock market valuation is currently at 133% of GDP. The historical percentage of market capitalization is 75%.

It is always risky to draw upon historical antecedent. But one historical fact we know is that markets fall much more quickly than they rise. And we know some tried and true market lessons”

1.     No one knows the absolute high and low. So we rely on herd immunity to save us from being “too” wrong.

2.     When the music is playing, we all have to dance. We must also make sure there is a chair nearby when the music stops.

Negative exogenous events do cause drops in markets. A nuclear strike by or against the DPRK would roil markets around the world. But the effect may be short lived if the DPRK fell, was occupied by Western and East Asian powers, and was stabilized and put on the path to democracy and engagement.

A bigger threat to markets is the extremely troubling actions and statements by Saudi Arabia and Israel directed at Iran. The level of bellicosity is ramping up and a war against Iran would send oil prices soaring as the Straits of Hormuz would be blocked and oil production equipment would be decimated.

In situations like this the US must exert leadership, not feckless self-aggrandizing twitter feeds. This administration sees diplomacy as a low priority and also seeks to abnegate the US leadership role in world affairs. In fact, it was recently reported that Secretary of State Rex Tillerson is firing senior career diplomats or forcing them to resign (5). The Author Rob is concerned that the risks in the Persian Gulf will require skilled and nuanced leadership from Washington, A skill that this administration has neither demonstrated or shown any interest in doing.

IT IS NEVER BLACK FRIDAY, NOR CYBER MONDAY, IN THE DESERT OF THE REAL!

(1)  https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#4882cd1d5dab

(2)  https://www.forbes.com/sites/jeffreydorfman/2017/07/07/the-student-loan-default-crisis-is-being-caused-by-promises-of-debt-forgiveness/#6c6f122741a4

(3) https://www.nytimes.com/2017/11/18/business/student-loans-licenses.html

(3)   “When the S**t Hits the Fan,” by the LA Punk Rock Band The Circle Jerks. https://en.wikipedia.org/wiki/Golden_Shower_of_Hits 

  (4)  https://www.investopedia.com/terms/d/dotcom-bubble.asp

employers.

(5) https://www.rawstory.com/2017/11/tillerson-is-firing-senior-diplomats-in-droves-or-forcing-them-to-resign-by-making-them-work-alongside-interns-report/

NOVEMBER 2017 DESERT OF THE REAL INVESTMENT NEWSLETER

 

Not even a lone trapper in the Alaskan wilderness could have missed the fact that markets are at record highs, after pushing through numerous previous records. The markets closed Friday (11.10.17), after a small pullback at 23,422 for the Dow, 2582 for the S & P, and the NASDAQ at 6,751.

 

Higher closes are possible, perhaps likely. But a pullback is also inevitable. Whether the pullback comes in stages, or is a massive correction, is not completely predictable.  But a factor relevant to the run up, and likely the pull back, is record low volatility. 

 

VIX is not the Nick Name for the Fourth Reindeer

 

The Chicago Board Options Exchange (CBOE) VIX VIXis a measure of the expected volatility of the S & P 500 for the next 30 days.  It measures implied volatility, or what the market predicts.[1] It is sometimes referred to as the “Fear” index. It reflects investor sentiment. It formerly has predicted decreases in the S & P.

 

The VIX has remained generally low over the last few months. Historically, a VIX value of ten is very low. But recently, the VIX has spent much of its time below ten, sometimes falling as low as eight.

 

The VIX has seen a spike or two recently. A recent spike happened on November 9^th, likely due to concerns that the republican tax plan would be delayed.  One can expect a volcano if it appears that the tax bill will not be passed, or only minimal parts of that proposal are passed. *

 

Where there is Momentum, There is Money. Where There is Volatility, There are Ways to Make Money

 

When markets move, either way, traders make money.[2] When markets reach stratospheric heights based upon discounted events, a substantial pullback is likely based upon the occurrence, or nonoccurence, of such event. So news of the collapse of the tax plan could send markets reeling. Investor sentiment of the possible failure of such tax plan may be presaged in the VIX.

 

Commentators have also noted that because the VIX does not include world markets, it is limited in its ability to gauge investor sentiment.  Others think that the VIX is being heavily shorted, effectively keeping the index low.

 

Get out Your Old Financial Economics Textbooks

 

Finally,  some believe that Fed monetary policy is uber-transparent, allowing market participants “real time” information about monetary policy and permitting market participants to anticipate and react accordingly.  This essentially creates a feedback loop where the market and the Fed match move to move. Market events are ostensibly discounted and the Fed is extremely accommodating. 

 

Investopedia Investor Anxiety Index (IAI)

 

The IAI is a broader, although less technically validated, index. It is based upon the sentiment of Investopedia readers worldwide. It captures three data points, macroeconomics, investor, and debit and credit sentiment. A reading of 100 on the index is considered neutral. The index currently stands at 101.9, very close to neutral.

 

Historically, October and November are the worst months for the markets. We are nearly one-half way through November, but those historical markers may not mean too much in a market like this. 

 

EVERYTHING IS DISCOUNTED, EVEN THE FIVE FINGERS, IN THE DESERT OF THE REAL!

 

* Although this is not generally a political blog, tax modifications, euphemistically called "tax reform," are merely grand plans for the operation of government, as artfully described by the late political scientist Harold Laswell, as "Politics: Who gets what, when, and how." This tax bill is a massive tax cut for wealthy business owners that own pass-through entities such as LLCs and LLPs. Lowering the corporate from 30% to 20% sounds meaningful, and may have some salutary effect. But since the effective US corporate rate is 18.8%, this piece of the bill is a canard. It provides modest tax relief to many middle income tax payers, and raises taxes for others. But the bill also zeroes out popular benefits for politically "weak" constituencies. In the Author Rob's personal view, he hopes the bill fails. The market will tank and he will clean up selling short positions. And a great injustice will be avoided.

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[1] Implied volatility is also a relevant value for options. Implied volatility will aid an options trader in determining whether the option is more likely to fluctuate in price than other options. Remember, however, volatility is not a directional indicator. It only predicts price movement.

[2] Actually, there are ways for traders to make money in flat markets.  But that is a topic for another day.