Thursday, November 30, 2017


Gravity is a word in the English language that can mean two things.

It is used in physics to describe the force that attracts a body to the center of the earth.

The word is also used to describe something that is extremely serious or of great importance.


In reviewing some recent charts and graphs recently I could not help but think of gravity, Sir Isaac Newton and that famous proverb, "what goes up must come down."

Let's take a look at a few charts where things have really gone up and ponder whether the rules of gravity may come into play at some point in the future. If gravity does comes into play, you can be assured that it will also result in investor anguish of the utmost gravity.

Most of these charts were in John Mauldin's recent weekly Thoughts From The Frontline newsletter.

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How about the rise in value of Bitcoin?


Bitcoin has risen from $972 at the beginning of the year to the $10,000 range.

Credit: Grant Williams via John Mauldin

A 10-fold increase in less than one year? For a so-called crypto-currency that for all intents and purposes is of questionable value unless you are involved in illicit activities or are a rogue government like Iran? How does this make any sense at all?

By the way, earlier in the week Bitcoin hit $1,200 before settling back in the $1,000 range.

Think gravity.

How about U.S. credit market debt as a % of GDP?

Credit market debt is down from its peak in 2009 (379% of GDP) but is still double what the economy has typically shouldered for most of the last 150 years.

Think gravity.

How about the S&P 500 and the Federal Reserve Balance Sheet?

If you wonder where the fuel came for the stock market increases since 2009 compare the rise in stock values with the increase in Federal Reserve assets. It explains at lot.

Credit: 720 Global via John Mauldin

The Fed is now talking about embarking on reversing the dollars it created during its "quantitative easing" program. (The projected drawdown over the next few years is shown with the orange line in the chart).

What does this tell us about the potential for future stock market values going forward?

You also have to consider the potential effects of Federal Reserve interest rate hikes. Rising interest rates typically draws money away from the stock market.

Think gravity.

Central bankers around the world have spent the last decade doing all they could do to penalize investors who were holding cash in order to entice force them to risk their money on assets. The entire idea was to take the profit out of holding safer savings and money market deposits and get investors to chase larger returns with their money in riskier assets such as stocks and real estate.

It appears they have succeeded.  Of course, as asset prices rise it attracts even more investors into the markets. With each rise in the market those that are on the sidelines start to feel more and more foolish by staying in cash.

For example, this chart shows the allocation to cash in the accounts of Merrill Lynch clients is at the lowest level in well over a decade.

It might be getting late in the game to find someone else to purchase your house or buy your position in the stock market and maintain your current gains.

Asset prices move with the laws of supply and demand. Prices rise as more buyers enter the market. Demand exceeds supply. We have been seeing that in the stock market recently. That is why cash allocations in the chart below are so low.

Credit: Fasanara Capital via John Mauldin

Prices fall as more sellers enter the market and there are fewer who want to buy. Supply exceeds demand. Think of the housing meltdown in 2009-2010 or look at the cash allocation in early 2009 above. There was a lot of cash being held in client accounts but few were eager to buy stocks as the market tanked.

Think gravity.

The funny thing about gravity is that things usually fall faster and harder on the way down than the force, effort and time it took to move higher originally.

Think about gravity as you ponder these charts and how big a fall back to earth would affect you. By doing so you may be able to escape sorrow and regret of the utmost gravity.

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