What’s next for the Global Capital Markets?

Global Capital MarketsBull or Bear Market

Dear PGM Capital Blog readers,
In this weekend’s blog edition we will discuss the outlook for the global capital markets, now that stock markets in the West are at an all-time high.

Will the rally continue, or will the market go side-ways, is there a crash on the horizon, or………..

In order to understand the process of shifting of wealth it is important for the reader to understand that all wealth from planet earth comes from its intrinsic value, which has remained more or less the same since the creation of our planet approx. 4.5 billion years ago.

This means that similar to energy, wealth cannot be created out of nothing, and can only be shifted from one asset class, person or country to another. As a comparison, the seasons in the Northern hemisphere are the opposite of the ones on the Southern hemisphere, in the sense that summertime in the North is wintertime in the South and visa-versa.

So, if we agree that wealth cannot be created out of nothing, every time we see a rally in any asset-class or market, we should ask ourselves which bear-market in another asset class or market is feeding this rally, and how long will it take before things reverse course.

Secondly, we have to watch out not to be fooled by measuring wealth in something that isn’t fixed. For example when we measure temperature in degrees Celsius, the Celsius scale has a fixed zero degree point (melting point of Ice at one bar atmospheric pressure) and a fixed one hundred degrees point, (boiling point of water at one bar atmospheric pressure).

In a Gold standard wealth is being measured and calibrated in a fixed quantity of Gold, which is similar with measuring temperature on a Celsius, or Fahrenheit or Kelvin scale.

In a FIAT money system on the other-hand, wealth is being measured in currency that isn’t backed by or calibrated in a fixed hard asset like gold.

The Shiller P/E ratio
Robert James “Bob” Shiller is an American economist, academic, and Professor of Economics at Yale University and is ranked among the 100 most influential economists of the world.  In 2012, Thomson Reuters named him a contender for the Nobel Prize in Economics “for pioneering contributions to financial market volatility and the dynamics of asset prices

Professor Robert Shiller is also the developer of the Case-Shiller index and Shiller P/E ratio.

The Shiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles and is calculated as follows:

  1. Use the annual earnings of the S&P 500 companies over the past 10 years (E10).
  2. Adjust the past earnings for inflation using CPI; past earnings are adjusted to today’s dollars.
  3. Average the adjusted values for E10.
  4. The Shiller P/E equals the ratio of the price of the S&P 500 index over E10.

Below Chart shows the Shiller PE ratio for the S&P 500.

Historical Shiller P/E chart

Mean: 16.48  
Median: 15.89  
Min: 4.78 (Dec 1920)
Max: 44.20 (Dec 1999)

As can be seen from above chart, the Shiller P/E Ratio closed on Friday August 9th at 24.23, which is approx. 47 percent higher than its historical mean value as can be seen in above table.

DOW to GOLD Ratio:
Global Market Indexes are measured in currencies. A better way to measured indexes is to measure them in ounces of Gold. Below charts show the 200-year chart of the DOW measured in Gold, or better known as the Gold to DOW ratio.

200 year Lineair DOW to GOLD ratio

Logaritmic 200 years Dow Gold Technical chart

Above charts clearly show the approx. 40 years DOW-Gold cycle and that we are currently in the descending trend from its peak of 44 reached in July of 1999.

With the DOW and Gold to closing on Friday, August 9th at respectively 15,425.51 points and USD 1,312.30 an oz, the DOW to Gold ratio was 11.75 on Friday August 9 2013.

The 200 years of equity/gold analysis indicate each peak in the ratio was followed by a full retracement back to the preceding lows. The emerging fundamentals indicate a recurrence of this trend and the equity/gold ratio has further declines ahead until a possible recapture of the 1980 lows.

Above charts shows also that currently the DOW to Gold ratio might be in a similar “Bear Trap” as the one of 1976-1977.

Professional versus Retail Investors:
History has proven, that institutional investors (the professionals) are a leading indicator, which way markets are going in the future and that the retail investor is always behind the curve and mostly is buying when the professionals are selling and vice versa.


Above 5-year chart shows the net 4-week average net buy (S&P-500 securities) of the professional versus the retail investor.

Above charts show massive buying by the professional investors early 2009, when the stockmarket was deep in the red and late 2012 when Bernanke announced the US$ 85 billion a month Quantitative Easing program. On both occasions private investors were selling.

Above charts show also, that since June of this year, the professionals has sold more shares than at any other time in the past five years, while on the other hand the retail investors buying is increasing.

NYSE Margin Debt:
History has also shown a correlation between the NYSE margin debt and S&P-500 as can be seen from below chart. By September of 2006, margin again went ballistic. It finally peaked in the summer of 2007, about three months before the market.


After the market low of 2009, margin debt again went on a tear until the contraction in late spring of 2010. The summer doldrums promptly ended when Chairman Bernanke hinted of more quantitative easing in his August, 2010 Jackson Hole speech. The appetite for margin instantly returned. Since April of this year we’ve seen the margin debt starting to decrease again.

PGM Capital Comments:
The Shiller P/E ratio, direction of the DOW to Gold ratio, the amount of NYSE margin debt net selling of the professional investors, can be seen of as a sign that the DOW is peaking.

On the other hand we see increasing demand and premium for physical Gold, Silver and other precious metals.

Share prices of mining conglomerates, like BHP Billiton (NYSE: BHP) and RIO-Tinto (NYSE: RIO), which functions as a leading indicators for (precious) metals, are also rising again after reaching a bottom early July this year, as can be seen from below 2-year chart.

BHP & RIO Tinto shares Prices

With central bankers on a printing spree and flooding the markets with fiat currencies, some of this fake money may continue to flow into the capital markets and by doing so send them to new highs measured in fiat currencies. What we are almost sure of is that measured in Gold or other tangible assets stock markets indexes will continue to decline.

All the above indicators show that a (sharp) decline of the stock-markets in the near future is inevitable and the longer it takes to happen, the higher the markets will go and subsequently the harder and deeper this crash will be.

Under the current situation it is advisable to reduce your positions in financials and retailers and to keep on adding precious metals and the stocks of their miners to your portfolio.

Please also take into consideration that currently market manipulations are very high and that governments and central bankers will do their utmost to depress the prices of Gold and Silver in favor of housing prices and capital market indexes measured in their local currencies.

Therefore, investors are advised to hedge their physical Gold, Silver and other precious metals via leverage ETF’s e/o trading.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Gold, Silver and other precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely

Eric Panneflek

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