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Valuation Matters



Remember the days of the era when everybody assumed great future wealth through Technology Shares? Any IPO that hinted at a tech back ground immediately raised fortunes as the new economy inspired visions of endless profits. The flagship companies of the day rose to enormous valuations during the exponential rise of the Internet. Yahoo, for example topped New Zealand in Terms of market capitalization back in 2000. Needless to say, that enthusiastic valuation has been brought back to Earth.


Russia-in-snowor apple???


Today, we find ourselves in another Major valuation discrepancy. Apple has nearly reached the same market cap as the largest Country in the world, Russia. According to my valuation models, Apple is fairly priced here yet Russia is priced incredibly low. It appears that the current political issues involving Russia have clouded Investors’ judgment regarding the Long term Outlook for Russia. While further disruption may cause continued short term downward Spikes in the Russian market, it appears very likely to me that the Long term Investor will make a killing if he buys and holds Quality Russian titles. It may not feel right and be the right match for everyone but the math does not lie. Choose for yourself who you would rather be in the  financial markets:

gandalfOr smeagol



Caveat Emptor!


A nuanced view


Having recently come from and lived in America for the past 16 years, it is very obvious to me that the perception of the state of the European economy across the Atlantic needs an upgrade. Since 2008 we have witnessed riots, financial collapse and awful employment numbers in the so called “PIGS” Portugal, Ireland, Greece and Spain. However, we hear very little about the engine of the majority of GDP within Europe, namely the northern European countries: Germany, Holland, Denmark, Sweden, Finland…

I have now spent the past week in Austria and yesterday in Germany and have noticed the following nuances to the European economy. First, it appears to me that while the economy overall is sluggish as it is in America, the core of economic output remains intact. In fact, take a look at the public buses used in Austria below. Needless to say, I doubt bankruptcy will be declared here anytime soon. Riots? I don’t think so.


At the same time, there are daily demonstrations in Southern Europe as many local and some state governments are teetering on the brink of financial collapse(Rome, Italy below).


In fact, a recent referendum in wealthy Venice resulted in the majority of Venetians wanting to secede from Rome and form their own country within the EU. Clearly, the dividing line between rich and poor in Europe has been increasing but in terms of regions rather than within society as can be seen in America. The question then remains, how willing and able are the diverging economies to stick together and at what cost. The best clue to that answer is painted on a steel mill in Linz, Austria, below(I took that shot while driving by).


“There can be no Europe without the Euro (currency)”. While this slogan clearly makes sense for that particular entity, I believe that the majority of the core economies is in favor of keeping both the EU and the Euro in place. After all, the EU and the Euro are political projects rather than economic ones. Given the ability and the willingness to do so buys this continent time to sort out its structural economic difficulties. This room to breathe is reflected in the Euro as being the strongest major currency for many years now. Having said that, the fundamental structure of the Euro remains terminally flawed and will have to be addressed as you cannot have 18 Treasuries/sovereign bonds under one unified currency. Unfortunately, the future of that needed resolution is murky at best and will probably require another painful crisis to kick-start.





Flying east


Today, I have some exciting personal news to announce which will certainly affect this blog to some degree. Four months ago I was fortunate enough to meet a group of extremely talented and motivated FX traders that have devised an algorithmic trading model that is truly unique in concept and performance. Due to their success in the past few years, they are now expanding and offering a fund vehicle on top of their managed accounts. Recently, I was asked to add my expertise to the mix and contribute in risk management and product development. As the firm is based in Switzerland and operates out of Switzerland, Austria and the UK, it is time to pack my bags and find my pass port. Needless to say, I will be rather busy but will try to keep this blog open and going. If you would like to follow our progress please visit us at


Finally, I would like to share a video that explains how High Frequency Trading has conquered the financial markets and after watching it you may understand better why I seek to find alpha in traditional market movement patterns over nanosecond technology that has extremely short life cycles yet high development costs.





The Golden Cross

golden cross

If you have stumbled across this article in order to gain insights on religion or jewelry, I must disappoint you right away. In financial markets,  the golden cross represents a significant bullish formation in the underlying asset as the short-term(trend) 50 day moving average crosses the long-term 200 day moving average(trend) on the upside. Market professionals watch the action around such rare formations closely as they tend to confirm a starting or changing trend.

Given the rather quiet major markets globally, it may come as a surprise that the gold market of all would be the one providing this interesting chart pattern.



Recently, we have read stories that the gold market may actually have been manipulated for many years now. This revelation has caused numerous market participants to call foul play in the supposedly free financial markets that we live and operate in. While I personally agree about the superiority of a free market price mechanism over central planning it is a matter of fact that most markets are either fixed or manipulated by political entities. For example, the Federal Reserve sets short-term interest rates and openly dominates long-term rates in the US via QE.  This manipulation leads to an artificial valuation in the equity market which compares equities in terms of opportunity cost to bonds. Furthermore, President Reagan set up the “Working Group on Financial Markets” by executive order  in 1988 to make sure volatility in the stock market is subdued. Recently, we have also heard about large Libor and FX manipulations over the past decade and we all know about agricultural subsidies globally. Get used to it, the financial markets are all manipulated if not pegged(think Swiss Franc or Chinese Yuan) and so is the gold market.

Does it matter?

If you are a speculator on gold futures trading on margin rather than buying gold as an insurance for financial disaster, then yes, you are being hurt by the ongoing downward manipulation of the gold price. However, if you are a savvy investor in gold who owns physical bullion and respects the fact that the current gold price is artificially suppressed, you will cheer at the opportunity to acquire a true asset at a discount. In the end, manipulation never matters as market forces eventually take prices to where they ought to be. In terms of gold, remember that the price of an ounce of gold was $35 in 1971 when President Nixon “temporarily” suspended the gold fix to the dollar. Today, 43 years later, that same coin costs $1340, roughly 38 times as much, with or without manipulation. Most importantly, the average cost of mining gold is around $1250 an ounce right now and that level should act as a price floor(it has so far) for anyone interested in acquiring gold as an asset.  Finally, gold looks set to break into another bull market on the charts but if it doesn’t do so on Monday, Tuesday is another day and next month another month… Know why you own the metal and act accordingly or stay away altogether. Caveat Emptor!

gold rush

Jim Rickard’s vision for the global monetary system


If you look at my “Good Reads” section to the right of the blog, you will find the book “Currency Wars” by Jim Rickards. Mr. Rickards is one of the most sophisticated minds when it comes to the global monetary system. While I do not share all his views expressed in the (Dutch TV, English language) interview below, I highly recommend taking some time to listen as the currencies you own will determine the actual purchasing power of your assets and ultimately, your financial future. Enjoy!

The Risk of not seeing the Forest for the Trees


When the media or the general public refers to “the market”, it is predominantly fixated on the stock market. I suppose individual companies and their strategies are more exciting to discuss than the grain supply in Iowa or the Mexican peso. Many times throughout my career I have been approached with the question of why I chose to concentrate on the currency market when the “real” market is clearly equities? The simple answer is that FX constitutes the biggest and most liquid market in the world and therefore involves any monetary transaction that happens across borders. Look at your smart phone for a second and consider the various components’ geographic origins and you will realize that in order to put that phone together it probably took many currency trades between the manufacturers, shippers, marketers and sellers of this phone. The same can be said of most items we possess these days.

The global market

curr image

Let us take a look at the size of the various financial markets in the world. First, consider daily volume below:


As you can see, the size of currency traded daily is about 25 times the size of global equity markets. Missing in the chart but added for obvious reasons is the global bond market that has an approximate $2 trillion a day volume. which also dwarfs the stock market. As currency is practically speaking zero coupon debt with no maturity, the size of the global currency/debt market combined makes up 95% of daily volume in the financial markets while the remaining 5% are reserved for stocks. Having said that, a good part of the bond and fx markets revolve around global public companies that need to engage in these markets to mitigate risk or transfer productivity. Also, buying foreign equities entails a currency transaction, directly on a foreign exchange and indirectly via ADRs.(foreign shares traded at home in domestic currency). However, we hear very little about the effectiveness of multinationals in managing their fx risk, something share holders should and serious ones do consider.

Total size of the global capital market

Now that we have established the market share of each asset class on a daily volume basis, let us examine the total size of the global capital market next.


While this chart is somewhat dated, you can clearly see that the outstanding tradable debt in the world far exceeds the existing market capitalization for global equities. Evidently, the bond markets of the world should be given more attention by the any market participant who thinks of “the market” as the stock market.

Back to the Forest 

The point of this blog is to show readers who are fixated on the stock market that in reality, the major monetary flows occur via currencies and in bonds. Now ask yourself where the potential financial problems exist in today’s world? Overall, corporate balance sheets look rather healthy but it is the public debt and the bloated central bank balance sheets that carry most of the outstanding risk. In other words, when the next economic down turn reaches the “core”, we will likely notice it first in the currency and bond markets as we do today in the emerging markets. Considering the size of these markets you may wonder how big the ramifications will be which is unknowable at this point beyond the fact that they probably will be very substantial. As for stocks, we may at first find ourselves in a rapidly rising stock market in blue chips once Treasuries sell off and currencies devalue. Money will likely continue to move out of cash and bonds and look for tangible assets such as stocks, commodities and (unlevered) real estate, driving those prices higher, aka stagflation. In the meantime, I would recommend sharpening up on your fx skills where large movement is likely to emerge in the coming years. Finding the right currencies to be in may be an effective way to hedge your portfolio regardless of stocks and bonds.


For those of you who would like to learn more about the currency market, below are some interesting charts regarding composition, turnover, market participants and location of this particular market.


FX daily turnover


A Balancing Act

Balancing act

The world economy today is a highly interconnected system as the process of integration has been greatly accelerated by the technological and political changes that globalisation have brought in recent decades. While the overall trend of progress has contributed to higher living standards and a better quality of (political) life and rights, we now face a period of time that will require extraordinary skill by our leaders to avoid chaos. In the aftermath of the financial crisis, mountains of debt and money have been created out of thin air in order to keep the major financial institutions solvent. Interest rates were practically abolished and liquidity given to any entity deemed systemically important.

Six years have passed since the financial crisis began in 2008 and now the world economy faces a new problem: How can monetary policy be readjusted to normal levels of interest and debt without causing economic chaos? The Federal Reserve in America alone added $3,000,000,000,000 to its balance sheet while interest rates are at 0.25%, about 5% below the average historical short-term rate. Picture a million dollar house and think 3 million of these and then you understand the excess debt the Federal Reserve has added to its balance sheet. Who can it sell these government bonds and mortgages to without collapsing the bond market and housing markets and spiking interest rates? Some people claim the Fed could simply let these bonds expire but that would require the Federal government to run huge budget surpluses for decades which is unrealistic at best.

The new Fed Chair, Janet Yellen, has announced the continuation of the so-called “taper” in which the Fed will slowly print less and less $ every month to add onto their balance sheet. This is the right policy but the ripple effect can already be seen in the emerging markets of the world. Whether it’s Venezuela, Thailand, Indonesia, Argentina, Brazil, Ukraine or Turkey, the idea that less new money will be added to the global economy means that the “hot” money is in full retreat and looking for the safe havens of the world. Those would be blue chip stocks, real estate, commodities and AAA bonds. This is exactly what we observe today and it follows the pattern of previous financial crises where the periphery’s assets crumble before the core catches the flu. Take a look at the Turkish lira and -interest rate below:


The lira has lost almost 25% of its value against the dollar in 2013 which prompted the Turkish central bank to nearly double its interest rate from 6.75% to 11.5%. As western central banks announce a future contraction of liquidity, money flows out of emerging markets and seeks a safer home at the core of the world economy. As a result, western stock markets are rising along with commodities and interest rates there appear to be in check, for now.

While this stage of global economic development appears to be normal growth for people at the core, it is merely the calm before the storm. If global central banks are unable to reduce balance sheets and raise interest rates steadily, it is likely that what we witness in emerging markets today will be seen everywhere once the central banks lose control over the markets. Imagine what 11% interest rates and 25% inflation in a year would do to your economy. Having said that, I do not see the contagion effect that I described here to the “core” before the end of 2015 as the market trend is clear and must be respected. However, sooner or later we will be forced to face the consequences of the decisions of the past 6 years and deal with them. Let us hope Mr. Putin does not create a “sooner” scenario.


Thank You


In the absence of significant financial news this week I would like to use today’s post to simply say “thanks” to all the readers that have followed my musings for the past 15 months. Seeing that “Market Owl” has reached people in 120 countries encourages me to continue with this site even when other (weekend) activities might appear to be more alluring.


World Map of readers by country.

Bravo Professor Yellen


The past week was marked by a grueling six-hour session with the new Fed chair, Dr. Janet Yellen, in which Congress grilled the decorated professor on many levels of the economic and monetary policy spectrum. Readers of this blog know that I have been highly critical of Fed policy ever since the financial crisis was arrested in 2010. However. Mrs. Yellen did a remarkable job to reassure Congress, markets and anyone listening that she is in control and fully aware of the real economic issues that are somewhat misleadingly reported from time to time.

This first public appearance as Fed Chairwoman was well received by financial markets around the world and deservedly so. Keep in mind that when Alan Greenspan took over the Fed in 1987, he was faced with the crash of 1987 within the first year in office. Likewise, Ben Bernanke took over in 2006 and we know what happened after that. In my opinion, Mrs. Yellen faces a near impossible task to juggle the Fed’s money printing activity with a gigantic Fed balance sheet but to her credit, she seems better fit for the job than anyone else I know.

As for the markets, keep watching the chart below. As long as the markets follow the Fed balance sheet, the situation is and will remain under control.

At some point in the future and in my personal opinion in late 2015, the Fed will eventually lose control of market confidence and we will enter a major global financial crisis. The trigger will most likely be either an out of control bond market or chaotic currency movement as outlined in   “The trigger for the next financial crisis”. Until signs of a break down appear, do not fight the trend and stay the course.  Caveat Emptor.

The Trend Resumes

Bull vs. Bears

On Monday, financial markets around the world seemed to be losing their grip and news commentators were nervously calling for a variety of interesting near apocalyptic financial scenarios. Who can blame them? If you assumed that financial markets were based on fixed money supply, current stock valuations would surely be too elevated as dire economic conditions around the world today are simply not reflected in nominal values of assets globally.  By the end of the week, the fear had subsided somewhat(look at the VIX below) and to add confusion to many minds, the big move up that we witnessed in stock markets on Friday was due to the fact that the US employment numbers were awful(and would imply more future money printing). Why do the markets not reflect economic reality anymore?


Readers of this blog know that ever since my first post, I have stated that we live in stagflationary times in which economic output sputters along while prices increase. While we can endlessly argue about the actual rate of inflation, it is clear that it exceeds the nominal rate of interest that can be earned in a bank account, currently about 0.1%. Bonds don’t fare much better and considering the global monetary base below, why would anyone in their right mind want to hold cash or bonds below their level of depreciation?

Global monetary base

When governments around the world issue more and more debt(bonds), the price of them should fall and this would be the case were it not for the global central banks printing money to purchase government debt. Needless to say, this policy will end at one point in the not so distant future and lead to grave losses for bond investors.

Real Assets


A rational investor will come to the conclusion that the bond market is artificially propped up by central banks globally and cash is undesirable because it yields nothing while it loses purchasing power. Keep in mind that Mr. Bernanke printed lots of US$, Mr. Kuroda Japanese Yen and Mr. Draghi Euros, Mr. King Pounds… Nobody has printed houses or Pepsi Shares. Herein lies the attraction in real assets. While no asset is entirely detached from monetary and fiscal policy, real assets can only be devalued through taxation and economic conditions, not outright supply expansion as we see in cash and bonds. Therefore, I continue to see the stock market surfing wave 5 of the Elliot wave I wrote about a few articles ago(Surfing the Elliot Wave). Trends in general do not change without an accelerated spike both on the upside(greed) and on the downside(fear). So far, we have not witnessed the near vertical, enthusiastic push to the upside and while the economy looks weak, stock prices are likely to continue going up as more fresh money is pumped into financial assets, hence stagflation.





Pot of gold coins

I would like to point out that this is a wonderful time to purchase gold as an insurance product against any financial portfolio. It is currently trading at roughly the cost of production, historically speaking a great entry point because if the price drops, there will be less gold mined pushing up future prices. Should the financial markets ever get out of the central banks’ control you will find yourself clinging to the 5-10% gold hedge as your financial life boat. And in case utopia sets in and there is never another downturn in the future, you will still hold the same amount of ounces rather than pay insurance every year. Given that over time, all asset prices increase nominally, I would assume that gold will as well or otherwise it will not be mined anymore which would certainly boost the price.

Finally, I would like to add that if you consider buying gold, please buy the physical product. The gold market is very interesting as it exists in many different forms. If you choose to buy a gold certificate from a bank that entitles you to a certain amount of ounces, the gold is yours only in thought. After all, the central bank owns the physical metal, leases it to a bank and that bank then sells you the right to that gold. The problem with this mode of accounting is that the gold you think you own now has three owners: The central bank, the retail bank and you, the customer. If there ever were a financial panic, do you think you would be able to go to the bank and pick up your coins? “Probably not” would be my answer as we are used to having “bank holidays” when markets are in disarray. As for buying futures at an exchange and not taking delivery, keep in mind that the COMEX has only about 10% of gold in storage against its outstanding claims meaning that if customers actually took delivery, the COMEX could not comply and would have to settle in cash as its rules allow.


Stagflation in conjunction with financial repression(negative real interest rates) is a monetary phenomenon that is widely misunderstood. As long as the global financial system chugs along and Mrs. Yellen does not crash the party by reversing QE, expect all real assets to rise in price as smart money attempts to avoid the loss of purchasing power through cash and bonds. Within the wide array of real assets, it takes due diligence to find the right mix of these assets. Good luck!




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