Washington, DC -- (ReleaseWire) -- 07/01/2014 --Nationally Syndicated Financial Myth Busting Radio Show with Host Dawn Bennett, CEO of Bennett Group Financial Services, LLC, on June 22, 2014, interviewed Michael Belkin, an institutional and hedge fund consultant, as well as the publisher of The Belkin Report.
A portion of which is dedicated to press clips where he highlights what the world press is seeing and hearing in the financial universe. This past week, that section was about central bank manipulation with a focus on the Financial Times' June 16th, 2014 piece about how central banks and institutions have poured close to 29.1 trillion into equities, including gold.
Here is the interview with Michael Belkin:
Q: So to my mind, this past week went from a conspiracy theory to a conspiracy fact when the Financial Times reported on June 16, 2014 that a cluster of central bank investors have become major players in the world equity market, investing an estimated $29 to $30 trillion in equities. Since the world equity markets are about $60 trillion, does that mean that the Federal Reserve and other central banks own nearly 50 percent of all stocks worldwide?
A: It's pretty crazy, isn't it? I think that number is kind of a generalization, nobody knows for sure. It's a report that came out that the FT got a hold of. It's kind of ironic that some of these guys are my clients. I have wealth funds around the world, and I'm telling them to sell. They are undeniably a factor beneath the surface, and they have been for a while. The Norwegian Wealth Fund owns 1 or 2 percent of all the stocks in the world, and the Chinese Wealth Fund is gigantic.
It's an example of the greater fool theory. At every top of every bubble somebody comes along. The Japanese bought Pebble Beach Golf Course at the top of their bubble. It turned out to be a disaster and a bad investment. In this week's Thursday's FT cover story, corporations are borrowing money and buying back their own shares to the tune of $200 to $300 billion. That’s a huge number. I haven't quantified this yet, but I think it's equivalent to all the earnings that the S&P 500 companies made in the first quarter, so basically they're pouring all their money into buying their own shares to prop up their stock at the top of a bubble so that CEOs can reward themselves with stock options and keep the price up. It's a pretty strange, warped world we live in, where the stock market has become like a lever in a cage that a rat can push to feed itself. Enough sugar water or cocaine or something, and they'll just keep pushing the lever until their bodies blow up.
Q: So to whom is the central bank going to sell to if they want out? How does a central bank successfully exit this unconventional monetary policy?
A: In the long term, it's obviously both the central bank buying and the corporate buying, which is obviously bearish long term. It seems ridiculous at the moment, like the market will never go down, but when/if stocks fall 30, 40, 50 percent, the other side of this equation, really, is public confidence in the market, and I think that Janet Yellen is doing everything to squeeze people into equities, and to keep them positive. All her public comments in her press conference this week, they're designed to be a smiley face. Here's the grandma telling you to buy stocks. It's okay. How can you resist it? The siren's call appealing to your emotions.
I'm convinced that once the public perception of risk in the market changes, public selling can overwhelm all of these other forces that we're talking about, and in fact the psychology of central bankers and the psychology of corporations can turn on a dime, too. But we've been waiting for this dime for five years. What dime is it going to be?
There are great ways to play this. I'm not saying there's going be a crash tomorrow or anything like that. Ultimately I think the market's going down big, and that we're at the top of a bubble, but the way to play this for my institutional clients, is a huge shift into defensive sectors. So institutional portfolio managers are getting defensive beneath the surface of this market. For instance, the consumer discretionary sector that led the rally since 2009, is down on the year, with the S&P up 6 or 7 percent and that's the biggest holdings of hedge funds. So the things that are outperforming are utilities, energy, and consumer staples. There's this strange movement into defensive and out of cyclical, and what's really starting to work is gold.
The two things that I recommend for individual investors are GDX and GDXJ. Those are ETFs of gold mining companies. GDX is major, GDXJ is minor, and they really took off this last week. It's something I've been recommending for a while but let's see, GDX is up on the week. It's up 22 percent on the year. On the week, up 7 percent, and GDXJ is up 32 percent on the year. So these are the gains that you can get from gold mining inflation plays and anti-central bank assets.
When gold rallies, it's a thumb down on what central banks are doing. It's a vote of no confidence in the monetary policies of the Federal Reserve, and the ECB, and the Bank of Japan, and Bank of China and every other central bank in the world. So when gold rallies, it's basically saying, "You are wrong. We don't trust you." I think it's just starting and that gold mining companies are the place to be. They're leading everything else this year, and I think they will go up when the market goes down, and they're going up even when the market goes up at the moment, so I think that's the place to be for individual investors at the moment.
Q: If central banks around the world, including the Federal Reserve, have put in $29 trillion into the market at this point, it's almost as if it's building a floor underneath the price of stock prices. So when you talk about a correction that hasn't come in five years, where's it going to come from? What's going to be the trigger?
A: Public psychology. There’s still inflows into mutual funds, so there's a three-prong thing going on, where central banks are buying beneath the surface, and corporations are buying their own shares and individuals are buying small, not big. I think that when the individual selling starts, and basically you can't make the market go up when the economy goes down, and we have this illusion of economic strength, but actually corporate earnings were down in the first quarter, maybe they'll be up a little bit in the second quarter, but economic expansions and trees don't grow to the sky. The global economy is beginning to contract. China is in a big mess.
Emerging markets that sell stuff to China, everything's sort of beginning to shrink. We have wars going on in a couple places around the world in Iraq and the Middle East. The price of oil is rising. These are all negative events for the economy, and I think corporations will begin to announce weaker results, and losses, and I'm nervous about retailers. Retailers are down on the year and we have a lot of teetering retail companies that are primary residents of malls in this country.
Sears and JCPenney and all these big chain stores, as well as a lot of specialty retailers. So I'm expecting bankruptcies, and not an overwhelming crash at first, just a wave of weaker economic news and corporate earnings, and then people wake up and say, "What am I doing in the stock market here? The market's trading at 17 times earnings, the more long-term average is more like 13, 14." When earnings start declining, there's really no room for error. We're talking about a change in psychology. Obviously it hasn't happened yet.
Institutional investors are going defensive beneath the surface, and the gold mining, the rallying gold stocks and gold shares, and gold itself is saying "Something funny is going on and we don't trust it."
Q: Yeah, I think last week was a turning point. If the Dow and the S&P are priced where they are because of unnatural buying, what do you think they would be trading at on their own today?
A: Well, the best answer for that is the stock market went down 50 percent in the last two recessions, so in a recession, down 50 percent is kind of a benchmark. So it went down from the top in 2000 to the bottom in October 2002, about 50 percent. It was down more than 50 percent from the top in 2007 to the March 2009 low. So, ballpark 50 percent downside risk in major stock indexes. The sector that went up more in this last cycle were small caps like the Russell 2000, which is hardly up on the year. It’s really lagging. The leaders of the previous rally are acting weaker beneath the surface of this market. So small caps are not the place to be. They probably could fall more than 50 percent over the course of a bear market.
That's what I'm telling people, downside risk, and the way to play it is to be in defensive sectors. Long short, you can be market neutral for hedge funds. That's who I advise. You can do long energy stocks and short consumer discretionary. A lot of technology stocks look weaker to me but that's not the primary area where I would be. I think the opportunities are in the short side. A lot of my clients are short sellers. I see a lot of names that I think have a lot of downside risk in the market. So I would be shorting things for professional investors. It sounds crazy with the market going up and seems like it's strong every day.
Q: To your point, when there isn't fundamentals pushing it up, it can't go much higher. My worry is it can't go lower because they've got a floor built in, but you know, it can't go higher because the fundamentals aren't there. Fed Chair Janet Yellen this past week was talking about a stock model that the Fed watches to get a feeling for valuations. Do you know what model she was talking about?
A: Yes, they just compare the yield of a 10-year treasury to the earning field of the stock market.
Q: That's it?
A: Yeah, it's very simplistic, and I'm a big critic of Janet Yellen. We hail from the same university, University of California Berkeley Business School, and I had to sit through her presentations to the alumni. I'm a big supporter of the school. I'm in the Alumni Association, but she puts people to sleep. We're not talking the brain of Britain here.
Q: Well she does answer things in a very simplistic way, with not much content or detail. I give you that.
A: We laugh, but it's tragic, you know?
Q: It's so tragic. What's driving the disconnect between the recent data and the Fed's outlook? It just seems to be two opposing ends.
A: What’s simmering beneath the surface here is they printed a whole boatload of money, and it's beginning to seep into the prices of things. The services, CPI, is way up, and the energy price. Here we are with $100-something oil, $110 oil in Europe, and when you get an energy price spike, we've got basically a revolution going on in Libya, a major oil producer. Iraq is one of the top oil producers in the world, and all of a sudden looking shaky. I believe they have set the stage, planted the seeds of the next inflationary crimping of the global economy, and she's sitting there saying there's no inflation, "Oh, don't worry about it. It's no problem. It's fine."
"It'll be great, we'll take care of it." I think history is going to be a very bad judge of the central bank policies, particularly Bernanke, and now Yellen, who is even more blatant about pretending everything is okay while Rome burns, basically.
Q: The west central banks say they were sellers of tangible gold for so many years. What do you think gold is actually worth? Do you have any idea? If in fact people start to acknowledge that the U.S. dollar, even the Yen, or the Euro, is getting weaker and weaker with this constant printing of money, what do you think gold would be worth?
A: There’s a great book on that subject called "The Death of Money" by Jim Rickards. I just spoke at a conference in Hong Kong with Jim, and I just finished his book, and he comes up with a number like $9,000 an ounce. If you try to balance the amount of money printing, the measure he used was M1, or M2 or a combination of something.
Q: Could you see us heading to a gold standard?
A: It's possible. He presents a case for it being the solution in an international monetary collapse. They will certainly go back to it to stabilize things, and in order to do that, you'd have to come up with a level that he is putting on it like $9,000 an ounce, which is so far above current levels.
Q: Look how quickly things are correcting. We seem to be going right-side up pretty fast at least if last week was an indicator. How can people actually get the Belkin Report? It's such an amazing report. My staff and I just eat it up every time it comes in every week.
A: Well, it's institutional and expensive, it’s not for individual investors. Institutions can Google me or Belkin Report. It's monitored and marketed by MP Research. You can Google that, but it's not really an individual investor newsletter. I work with professional investors, and I'm basically asset allocation for portfolio managers. That's what I do, and basically long short ideas, overweight this, underweight that, be long this, be short that. It's everything from stocks, bonds, commodities, currencies, et cetera. Emerging markets.
Q: Michael, we love having you on. You give such great insight, and you tell people what to do, and they're so desperate out there. Your track record is just impeccable when it comes to returns, so if anybody wants to re-listen to the show, you should, and take Michael's advice to heart because he is very good at this.
Bennett Group Financial Services LLC, based in Washington, D.C., is a comprehensive financial services firm committed to providing opportunities to clients’ as they seek long-term financial success. Its customized programs are designed with the potential to help grow, lower overall risk and conserve client assets by delivering a high level of personalized service and skill. For more information, call 866-286-2268 or visit http://www.bennettgroupfinancial.com.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
The show airs live on each Sunday at 11 am EDT. It now has over a year’s worth of achieved interviews for listeners free on-demand at http://www.financialmythbusting.com.
Dawn discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included Rock Legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN as well as take podcasts on the road and forums for interaction. The show is a great complement to Dawn’s monthly investing seminars that take place at Tysons Corner in McLean, VA, where she discusses investing.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org