In a World of Economic Ice…
- Deflation everywhere: Even the art market is taking a hit
- Chris Mayer on identifying 100x companies amid economic “ice”
- Just when stocks are in sight of record highs again… wham!
- The official national debt spikes again… but what about the real one?
- China’s creepy credit score on steroids: How far behind is America?
When the art market hits a wall, you know we’re in the icy grip of deflation.
In times of prosperity for the wealthy and powerful, the wealthy and powerful fall all over themselves bidding up the price of modern art pieces. They’re an outstanding inflation hedge. Our Jim Rickards says his art investments have been his best performers in recent years.
The auction record for a painting was set in 2013, when Francis Bacon’s 1969 triptych Three Studies of Lucian Freud went for $142.4 million…
… only to be surpassed last May by Version O of Picasso’s Les Femmes d’Alger series, going for $179.4 million.
How things have changed in only six months: “More than half of the works at Phillips’ 20th Century and Contemporary Art auction sold below their estimates, if they sold at all,” says this morning’s Financial Times, “in a Sunday evening New York sale that strikes a somber note for the upcoming week of sales.”
That doesn’t bode well for Sotheby’s, which hopes to auction a Cy Twombly chalkboard painting for more than $60 million. Sotheby’s trades on the NYSE under the ticker BID. It’s down nearly 5% as we write this morning.
“Ice” is an economic condition first described by the late Barton Biggs, a strategist at Morgan Stanley. It contrasts with “Fire” — as in the Robert Frost poem about how the world might end.
“Ice is a loss of pricing power,” wrote Biggs in a 1997 memo, “and a world where prices are as likely to go down as up. Ice is an erosion of profits. Ice is excess capacity. Ice is developing countries with low-cost factories and huge new labor forces. Ice is creative price destruction from technology… Ice is also about competitive devaluations, as countries try to export their unemployment and lack of growth.”
“Ice was Biggs’ metaphor for deflation,” says Chris Mayer of Mayer’s 100x Club. “It’s playing out all over again.
“In the recent round of quarterly conference calls, nearly every grocery store complained that food deflation hurt their results.”
Whether it was high end (Whole Foods), low end (Wal-Mart) or in the middle (Kroger, SuperValu, Roundy’s), the word “deflation” came up over and over. “Prices are falling at grocery stores. Ice-encrusted earnings reports drag down share prices and sink expectations.”
Meanwhile, “We’ve spent a lot of time looking at restaurant stocks in recent months. We’d like to own a local or regional concept that can grow nationally. The history of 100-baggers has several restaurant stocks that went from small local player to national chain.
“But there too firms have been reporting Ice floes. Cost pressures squeeze their profit margins. Sales growth slows. Chipotle’s stock fell from $750 per share to $600 per share in the blink of an eye after an Ice-encrusted earnings report.”
And look at the energy industry: “Too much capacity. Too much debt. Low prices for oil and gas. In other words: Ice.
“‘While everyone talks about the Fed and interest rates, I think it’s Ice and slush and its heavy effect on earnings,’ as Biggs wrote, that has chilled many stock prices in recent months,” Chris goes on.
“Interest rates are not the primary driver of stock prices in any event. Earnings are. Low interest rates can aid earnings in obvious ways, but nothing happens in a vacuum. Low rates often occur during times of slow growth. Japan’s interest rates have been on a long slide to zero, but it hasn’t boosted Japanese stocks over the years. It was weak earnings and low profitability.”
So where are the good buys now? “Markets pushing their way through Ice tend to prize companies with earnings growth,” says Chris.
“In the 1950s and 1960s, as Biggs points out, companies that could grow earnings sold at 40 times earnings or more. This may explain why the market today seems to give high valuations to proven fast growers, like Facebook. The latter goes for over 100x trailing earnings. Or maybe everybody is just crazy.
“Otherwise, lower multiples are the rule in an Ice age. Growth is what pulls you through. But that growth will be harder to find. And small setbacks can mean poleaxed stock prices in the near term, as we saw with Chipotle.
“While we don’t try to time the market in any way, we do pay attention to the environment and the cycles. And Ice seems a good hypothesis right now. Many of our stocks have that ability to power through Ice.”
For access to all the Mayer’s 100x Club recommendations — and a free copy of Chris’ book 100 Baggers: Stocks That Return 100-to-1 and How to Find Them — just enter the password “mayers100x” at this link.
The major U.S. stock indexes are navigating through ice floes as a new week begins — they’re all down nearly 1% as we write.
The S&P 500 rests at 2,080 — about 50 points below its all-time high. Which happens to be proving a stubborn level of resistance…
“Prior highs up at 2,134,” says Jonas Elmerraji of our trading desk, “remain the big target that this current rebound needs to take out in order for markets to really steam into 2016.
“So far, I’m not seeing anything that suggests we won’t achieve that, provided the central bankers at the Fed don’t gum things up too badly by doing something with interest rates that market participants aren’t expecting.
“We need to wait and see how Mr. Market interacts with that big 2,134 level. But the bones of this rally still look strong from where I sit.”
Yikes: The national debt leapt more than $100 billion in only three days last week.
As we mentioned last Wednesday, the Treasury has ceased the “extraordinary measures” it implemented last March to stay below the debt ceiling, now that there’s a budget deal in Washington. The national debt, which held steady at $18.15 trillion for more than six months, suddenly hit $18.49 trillion as of last Monday, Nov. 2.
But look what happened in the following three days: This is the latest table we grabbed this morning from Treasury’s website…
No, we don’t see a ready explanation. Guess when you’re dealing with numbers this large, $100 billion becomes a rounding error.
Meanwhile, our favorite budget hawk has revised his estimate of the real national debt: It’s $65 trillion.
David Walker is the former U.S. comptroller general — and the protagonist of I.O.U.S.A., the 2008 documentary produced by our executive publisher Addison Wiggin. He was interviewed over the weekend on WNYM radio in New York.
“If you end up adding to that $18.5 trillion the unfunded civilian and military pensions and retiree health care, the additional underfunding for Social Security, the additional underfunding for Medicare, various commitments and contingencies that the federal government has, the real number is about $65 trillion rather than $18 trillion, and it’s growing automatically absent reforms,” said Mr. Walker.
Hoping against hope, Walker said the politicos need to get their act together: “You can be a Democrat, you can be a Republican, you can be unaffiliated, you can be whatever you want, but your duty of loyalty needs to be to country rather than to party, and we need to solve some of the large, known and growing problems that we have.”
“Wow, this is next-level insanity,” said the email from colleague Chris Campbell, editor of our sister e-letter Laissez Faire Today.
Chris and I were emailing back and forth last month about a new “credit score on steroids” being developed in China.
The ACLU calls it “the ultimate tool of social control… Everybody is measured by a score between 350 and 950, which is linked to their national identity card.
“In addition to measuring your ability to pay, as in the United States, the scores serve as a measure of political compliance. Among the things that will hurt a citizen’s score are posting political opinions without prior permission, or posting information that the regime does not like, such as about the Tiananmen Square massacre that the government carried out to hold on to power, or the Shanghai stock market collapse.
“It will hurt your score not only if you do these things, but if any of your friends do them. Imagine the social pressure against disobedience or dissent that this will create.” And because everyone’s scores will be posted publicly, you’ll know who’s dragging your score down.
“Those with higher scores are rewarded with concrete benefits. Those who reach 700, for example, get easy access to a Singapore travel permit, while those who hit 750 get an even more valued visa.”
Gosh, it’s a good thing we don’t have anything like that here in the land of the free.
Oh, wait, what’s this? “Social Media Activity Might Affect Your Credit Score,” says a Chicago Tribune headline.
No longer is your payment history and such good enough for FICO, the best-known company that calculates credit scores. With so much of your personal life out there to be observed in the Web, FICO is developing ways to grab it and add to your profile.
“Now,” says the paper, “with so much more personal data out there, companies have come up with the software to capture it. Generally, the technology allows a credit rating company to search for certain key words, phrases and slang terms for drinking and partying — like getting smashed, trashed and wasted…
“If you look at how many times a person says ‘wasted’ in their [Facebook] profile, it has some value in predicting whether they’re going to repay their debt,” FICO CEO Will Lansing tells the Financial Times.
Oy. We’ve long had contempt for the FICO score. It says nothing about your income or how your debt load compares with your income.
The social media profiling isn’t on the Chinese-level scale, of course… but we can’t help recalling the words of NSA whistleblower Bill Binney, who said in 2012 the electronic elements are all there for a “turnkey totalitarian state.”
“Is Jim Rickards saying this is the best time/price to buy or sell gold pertaining to the big banks having to get out of gold?” reads an inquiry following up from Jim’s remarks here two weeks ago. “Because that’s a big bunch of buyers leaving the market! Sounds like I should sell what I have, as this may be the best it will get with them all selling.”
The 5: Not at all. It’s true the big European banks can no longer count gold as a “good asset” toward European Union liquidity standards.
But that’s hardly a sell signal. Gold is an asset you’ll want to be holding whenever the powers that be decide to reorganize the international monetary system. That won’t be tomorrow or next week… but it might well be next year.
“Do you know how powerful the words ‘strike’ and ‘Internet blackout’ are?” a reader writes after we took note of plans for a new Atlas Shrugged TV series updated for the 21st century.
“Google, Amazon, Netflix — gone.”
Hmmm… See above about Facebook and your FICO score.
According to the helpful “Who Has Your Back” report from the Electronic Frontier Foundation, neither Google nor Amazon tells its users about government data demands. Nor do they disclose their policies on data retention.
We daresay the updated Atlas Shrugged is sure to be critically panned for having a plot that’s not believable!
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