The Year 2014, the Year of the Truth.

Dear PGM Capital, blog readers,

First of all we wish you and your family a Happy and prosperous 2014 and may all your wishes and dreams become reality this year.

In our New Years’ blog edition we once more want to look back to 2013 and see what lessons we can learn from the previous year regarding:

  • Peaking Shiller P/E-10 ratio for the S&P-500
  • Rising bond yields
  • When Investing “Think like Banker”
  • Some important quotes of Maynard Keynes
  • As January goes, so goes the year.

As can be seen in below chart, the Shiller P/E-10 ratio closed the year above the psychological important level of 26.00 point, and almost 60 percent of its 160 year mean of 16.50 points. Below the 160-year chart of the Shiller P/E-10, shows us that every time in the 160 years that we have seen the shiller P/E-10 ratio at a level of 26 or higher, the S&P-500 crashed the next year or went the following 2-3 years into a bear- or flat-market.

Current Shiller PE Ratio for the S&P-500: 26.17       -0.01 (-0.89%)

        4:33 pm EST, Fri Jan  4
Mean: 16.50
Median: 15.90
Min: 4.78 (Dec 1920)
Max: 44.20 (Dec 1999)

Ladies & Gentlemen, since May of 2013, when the FED first announced their plan to start tapering their bond buying program, the yield of the 10 year-note start rising to close and has closed the first week of 2014 at 3:00 percent as can be seen from below chart.

1-year chart 10-year note

Most Investors are asking them selves the following question:

Will we see in 2014 a repeat of 1994 a year in which rising bond yield has forced the FED to increase rates?

Due to the fact that most of you might not remember the events of 1994, we here below provide you with a summary:

On Wall Street, 1994 was the year many money managers lost their shirts.

A sharp, unexpected rise in interest rates wrecked the value of bond portfolios and turned profitable trades into money losers. Hedge funds blew up,  banks plunged into the red and the resulting shockwaves even hurt the equity  market, which reversed a strong start to end down on the year.

In other words, the year 1994 was a year for investors to forget.

But it is also a year  that is important to remember. Today, with interest rates at rock-bottom thanks  to the US Federal Reserve and other central banks, some bond market veterans are  hearing echoes of 1994. What will happen, they ask, when the Fed decides it has done enough to stimulate the economy? Could there be another shock?

The scale of the current bond bull market means that its end could be far  more serious than anything seen in 1994.

Apart from the distorting effects of Fed bond buying on the Treasury market,  there has also been a change in the size of interest rate-sensitive markets  since 1994. The value of outstanding bonds – US$ 37.7 trillion at the end of September 2012 – is three-and-a-half times what it was 19 years ago.

If you go to a banker and ask for a loan, which type of collateral will your banker accept and why?

Your banker will only accept hard assets in the form of either real-estate or precious metals as a collateral. The main reason for this is, because your banker knows that the prices of both asset classes, although they may fluctuate in the short term, in the longer term they will always go up and that the next peak will always be higher than the previous one (if there is no bubble) and, most importantly, the prices of both Real-Estate and Precious metals can NEVER go to ZERO.

So next time the investment advisor of your bank advises you to sell your Gold and to buy high flying assets like stocks of social media company or bitcoin, ask him if he can make an appointment with you with the credit department of his bank.

In the meeting with the credit department you should only ask him/her this question: Sir/Madam I have a great portfolio full of social media stocks and a lot of Bitcoins. Do you give a loan with these assets as collateral?

The answer of your credit manager will be your guidline for what to invest in for the long term!

The events in the global capital markets remind me to the following three famous quotes of John Maynard Keynes:

“The best way to destroy the capitalist system is to debauch the currency.”

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

“The market can remain irrational longer than you can remain solvent”

Who is John Maynard Keynes:
John Maynard Keynes (1883-1946), was a British economist who developed the theory that increasing government deficits stimulate a sluggish economy, was long the guiding light of liberal economists. He is considered one of the major economists of the 20th century.

These days, he is enjoying a comeback, with all those central banks printing money to stimulate their respective economies.

The January Barometer was first introduced by Yale Hirsch in 1972. The story goes that if the month of January is up, then so goes the rest of the year. Conversely, if the market suffers in the month of January, then the rest of the year will be tough sledding.

For the 64 years from 1950 through 2013, a positive return in January was predictive of a positive return for the year 92.5% of the time. A positive return during the first five trading days of January was predictive of a positive return for the year 90.0% of the time. A negative return in January was predictive of a negative return for the year 54.2% of the time—basically not predictive at all. A negative return during the first five trading days of January was predictive only 50% of the time, amounting to nothing more than a flip of a coin.

In the short first trading week of 2014, the S&P-500, tanked with approx. 1 percent, Bond yield rose slightly and Gold rose with approx. 3.1 percent.

Will the above be the trend for 2014?


Bond-yield & Gold:
Last year was almost a perfect storm. Between U.S. stocks rallying hard, India taking actions to make gold less attainable by her citizens, and the spike in bond yields combined with falling inflation expectations, there was no shortage of reasons to not divest the metal.

Gold has been an awful performer since mid September 2011, vastly under performing U.S. markets, with extreme weakness in 2013.

Everyone loved gold up until 2011, and everyone hates it now. The contrarian in me based on Warren Buffett famous quote:


says to me that now is the time to add more Gold to my personal portfolio.

The Shiller P/E-10 ratio:
In markets that are dominated by mainly Greed and Fear everything is possible in the short term, but with the Shiller P/E-10 ratio of the S&P-500 at a 5 year high and above 26 points, the chances for the S&P-500 to take a breather in 2014 are higher than 50 procent.

With central banks printing money all over the world and with gold prices far below the average break-even production costs, the chances of a continuation of the secular bull market for gold in 2014 is also higher than 50 percent.

The above mentioned quotes of Keynes, refer to financial bubbles and panics. The actual statement is that, in a crisis situation or periods of (extreme) greed, fear and manipulation, “markets can remain irrational longer than you can remain solvent.”  In particular, Keynes was referring to stock market crashes, frequently resulting from panic selling.  Asset bubbles consist of wild speculation in stocks, real estate or other assets.  The assets rise in price far more than is justified by any rational economic analysis.

We have seen such situations on several occasions quite recently in the high-tech bubble of the late 1990’s (which burst in 2000) and the real estate bubble of 2004-2006 (which burst in 2007), as well as the credit crisis of September-October 2008, and currently the bubble in stock- and bond markets in the West.

When we compare 2013 with 1999 we see the following similarities:

  • In 1999 technology and dot com, stocks with extreme high valuation doubled or tripled in price.
    • In 2013 Social media stocks did the same.
  • In 1999, the Crude Oil price declined with 30 procent to reach a price of US$ 8.90 per barrel on December 31st 1999, its lowest price in 4 years.
    • In 2013, the Gold price declined with 27 percent, to reach a price of US$ 1,205.00 an ounce on December 31st 2013, its lowest price in 3 years.
  • In 1999 every body was talking about the New Economy and how the new internet companies will change the world.
    • In 2013, it was all over social media stocks, how these companies will change the world and that we are now in a new economic order.
  • Last but not least in 1999 as well as in 2013, we frequently heard these two phrases:
    • It’s Innovation and we live now in a different world than before.
    • This time it is different.
  • Early March 2000, the dot com and technology stock boom came to an end and the NASAQ declined with 70 percent and till today haven’t reached its peak of March 6th, 2000, of 5048 points, as can be seen from below chart
    NASDAQ all time chart

Ladies and Gentlemen it is never different and since the first man came on planet earth till today we have had thousands or even millions of innovations and new technologies.

But in all these times one thing has remained the same; THE RULE OF MONEY.

The RULE of MONEY is timeless, and has never changed during the last 5000 years.

People also haven’t changed at the end their act is based on GREED and FEAR.

So will 2014 become a repeat of 2000, the year in which the bubble will burst and GREED to turn into FEAR and PANIC!


Until Next Time

Eric Panneflek

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