Secular Pressures Upon Speculative Portfolios – The Insurance Sector Seems Weak…
We usually reserve this kind of piece for our newsletter service, but as we’ve been waiting for two to three years for this particular intellectual insight to be confirmed by the market, I thought I’d mention it here. In this article, I take a look at the insurance sector and its recent deterioration relative to the broader stock market.
The Deterioration of Insurance-Sector Stocks:
As can be seen from the chart below, the insurance stocks have been diverging quite nastily from the broader stock market for some time now. The S&P 500 made a high on February 18th (at 1344), a low on March 15th (at 1249), a higher high on May 2nd (at 1370) and a higher low on June 16th (at 1258). In diverging contrast, the ‘KIX’ Index (the KBW insurance index — a modified capitalization weighted index of 24 insurance companies) made a high on February 18th (at 138), a low on March 16th (at 124), a lower high on May 2nd (at 136) and lower low on June 23rd (at 118). Since then the price action has deteriorated further: — the S&P 500 made a lower high on July 7th (at 1356) that is yet to be confirmed (i.e. it could still be taken out), whereas the KIX index made a confirmed lower high on July 7th (at 127). The latter is confirmed because it has already taken out its previous lower low.
Honing down to the individual stock level, it seems that this divergence is not subject to the trickery occasionally involved in the index aggregation process. Below are some of the worst ones:
As we all know, insurance companies have large speculative portfolios by default. Thus, the deterioration in the stock prices of major insurance companies may be an indication that the major investment portfolios of the world are coming under pressure. Primarily, we would attribute this to the prevalence of a bearish monetary trend.
The money supplies of the world consist of the central bank notes (that you can put in your pocket) as well as IOU claims upon those central bank notes (i.e. checking accounts at depository institutions). By 2007/2008, the banking system reached a maximum capacity of ‘IOU money’-production. Since the issuers of these ‘IOU claims’ (i.e. banks and other depository institutions) had unwittingly taken a large ‘synthetic short’ against central bank notes, we’ve entered an environment where these institutions are (periodically) pressured to unwind those synthetic ‘shorts on central bank notes’ (i.e. pressured to deleverage). In short, the money supplies of the world consist of ‘tiers’, where the highest are (typically) most precarious and the lowest are the ‘soundest’. Since 2007/2008, the monetary trend has been towards extinguishment of the higher tiers in favor of the lower tiers. As people rush to do this at the same time, there arises a ‘short squeeze’ in central bank notes – meaning, central bank notes rise against things (that is, asset prices fall). In the excellent book, Tragedy & Hope: A History of the World in Our Time (available at the greshams-law.com book store), Carroll Quigley explained this rudimentary ‘tier structure of money supplies’:
In each country the supply of money took the form of an inverted pyramid or cone balanced on its point. In the point was a supply of gold and its equivalent certificates; on the intermediate levels was a much larger supply of notes; and at the top, with an open and expandable upper surface, was an even greater supply of deposits. Each level used the levels below it as its reserves, and, since these lower levels had smaller quantities of money, they were “sounder.” A holder of claims on the middle or upper level could increase his confidence in his claims on wealth by reducing them to a lower level, although, of course, if everyone, or any considerable number of persons, tried to do this at the same time the volume of reserves would be totally inadequate. [Our Emphasis.]
[Although the same principle applies, it is important to note that the ‘points’ of modern-day money supplies are not gold, but central bank notes themselves. So, unlike formerly, this ‘point of the pyramid’ can be debased/debauched with the intention of preserving the shape of the entire pyramid of money. This is important because in a world where central banks are intent on monetary debasement, the periods of financial stress that we associate with this ‘short squeeze in central bank notes’ can be relatively brief (though, to be sure, existent!).
Anyhow, given that the majority of financial ‘risk assets’ are quite dependent on the prevailing stock of ‘IOU money’; this is negative for portfolios of speculative financial assets (‘risk assets’) on a secular basis. Even our most patient and long-term oriented readers might get a little annoyed by the age of the following video, but the trends above were lucidly summarized by Hugh Hendry a couple of years ago:
The Beginning of Something Potentially Nasty? Listening to the Market…
One of the attributes that we seek for our trades here at greshams-law.com (particularly for the newsletter service), is that our intellectual convictions are corroborated by price action. We’re haunted by the words of John Maynard Keynes, ‘Markets can remain irrational a lot longer than you and I can remain solvent.’ so we seek opportunities where the process has already begun (but, hopefully, is far from over).
The recent divergence noted above is exactly the kind of corroboration that we seek. Moreover, taking a look at the plain price chart of the KIE etf (a SPDR etf for the KIX index), we can see that we’re entering the price territory of the panic of 2008. As the people who bought during that panic see the price move into their entry points, they might easily feel like giving up:
The secular pressures upon speculative portfolios seem to be reasserting themselves. This gives rise to potential opportunities on the short-side of the insurance component of the stock market.
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012