Weekly Article 02-12-2019

I just noticed that today marks the 20-year anniversary of Japan lowering its interest rates to 0%.

In the last 20 years savers in Japan have not been able to earn any decent interest on savings and even though the Bank of Japan has “printed up” over a 100 TRILLION yen, purchased tens of trillions of Japanese Government  bonds, corporate bonds, stocks and ETFs in the tens of trillions of Yen also, the Nikkei Index, which at one point was over 39,000 sits at around 21,000. Minus 18,000 points over 30 years! (-42% for those keeping score!) Of course, all of that bond buying led initially to nice capital gains as the rates fell but the ultimate outcome is no decent interest being paid on bonds either. We are now approaching a generation of Japanese that have no idea what “saving” used to be.

This is what people are pointing to and calling a “success story”. It appears to me to be more of a horror show than a success story. It took 10 years after the initial stock and real estate market crashes to get to 0%. They were likely a little more timid since they were the first in the modern era to pull such a stunt.

10 years later and we now have negative interest rates, central banks conjuring up “money” globally, buying assets and all sorts of financial games being played without any shame or bashfulness at all. To me, it is a simple “Yeah- we’ll do whatever we want, whenever we want and there’s not a darned thing you can do about it”. It may be illegal for you ordinary folks out there to naked short assets but if you are part of the club- it’s ok! It is illegal for an ordinary citizen to “print” a $1.00 bill with the threat of a LONG prison term but if those “in charge” want to conjure up hundreds of trillions of dollars out of nowhere and buy real assets- well that’s just fine! Or is it? Just because it’s legal doesn’t make it moral.

As I have written before, all of this “printing” is just more debt.

Many are aware that our Federal Reserve has supposedly stopped purchasing assets as of 2018. I say supposedly because I don’t believe we have a clue as to what they are actually up to. According to their own reports, the other 5 central banks have been “printing and buying” like there is no tomorrow. Bank of Japan, ECB, Swiss National Bank, Bank of England, and The Peoples Bank of China have all been providing ample liquidity. This may be why regular investors, according t Bank of America, pulled $515 billion out of the US stock market in the last two months and yet it has rallied. The central banks appear to be staving off a stock market collapse by propping the markets up.

Ever since Mr. Mnuchin came out and said “the banks have ample liquidity” and met with the six Too Big To Fail banks the markets have been in rally mode- I wonder why?

I am also skeptical when someone in government assures me that all is well with something when it didn’t even occur to me that there may be a problem. I think I keep a pretty good eye on the financial markets and didn’t question at all that the banks had sufficient liquidity. Now, I believe there WAS and may still be a problem with this. A few reasons:
* Deutsche Bank issued 3.6 Billion Euro of 2-year bonds at a full 1.8% HIGHER than the prevailing rate.  Corinna Drose (Frankfurt based bond analyst for DZ bank) said “The high spreads reflect Deutsche Bank’s high idiosyncratic risk, which is rooted in the lender’s chronic weakness in earnings”.

My take is that they wanted to show that they could still raise capital in the bond markets to keep confidence in their ability to roll over their massive debts going forward but had to offer a bonus to get anyone to buy because of their impaired financial state.

  • Deutsche Bank also paid 2.3% more than the prevailing rate for 7-year bonds that can absorb losses in a crisis. (The Irish Times)
  • Wells Fargo had a blackout that lasted two days and saw direct deposits not show up, on line banking go down and ATMs seize up. In other words, no access to funds for a day or two. I have seen many people wondering out loud if this was not an excuse for a liquidity, funding or cash problem that they didn’t want to make public. The official story is a bit hard for me to believe that smoke caused a 2- day nationwide outage???  No backup systems??? Who knows but it pays to pay attention. I have also heard that there were also limits on what depositors could withdraw for a while also. I have personally been interrogated by bank employees when withdrawing multiple withdrawals in a week or an unusual amount (I won’t even say a large amount). Many have told me similar stories about numerous banks. Smaller banks don’t appear to be as restrictive as far as I can tell.
  • Unicredit in Italy paid 4.2% over the Euro benchmark in November signaling credit weakness there also. (FinExtra.com)
  • Not long ago Banco Santander took over Banco Popular for 1 Euro. Today the talk is about a merger between Deutsche Bank and Commerz Bank. These things usually only happen when they are forced to.
  • There are many “Zombie” companies out there. A zombie company is a company that cannot service its debts with current earnings and relies on new funding to continue operations. With rates rising this could become an issue for not only these companies but their lenders going forward.

The Chinese have an interesting saying that “Water keeps the boat afloat but can also sink it”

This has an interesting meaning when you think about this whole economic system is being kept afloat with massively increasing debt being issued by governments, central banks, commercial banks, cities and states of all sizes and companies. It appears to me that the world is now, indeed, drowning in it. The Chinese are seeing a massive slowdown in economic activity and corporate bankruptcies that were not even allowed to take place 10 years ago are occurring regularly. Maybe there is nothing they can do about it at this time.

The global economy is slowing at an alarming pace and servicing all of this new debt gets harder and harder as the debts continue to rise exponentially and incomes and economic activity do not. This makes everyone’s life more difficult. This is likely why we are seeing Yellow Vest movements across Europe and riots across the world.

Gold and silver appear to be being managed in the $1300-$1350 range with the same faux “money” being used to artificially prop up other assets. Oil appears to be also stuck in a range until something happens geopolitically or economically to upset the apple cart.

I still prefer real assets going forward from here. Paper assets can, and often do go to zero. Real assets may fluctuate in value but historically have always had value. Think of a house. If a house was built for $20,000.00 35 years ago the structure is still there. In the meantime in places like Long Island that house may have fluctuated between that $20,000.00 and $500,000.00 for the same house. In the mid 90s the house may have fallen to $200,000.00 from $300,000.00 previously and now is back up to $500,000.00. If the house was sold a few times some may have made a dollar profit and others may have taken a dollar loss. (This is a hypothetical example for illustrative purpose only and does not represent an actual investment)

Economic cycles happen. Many people buy expecting prices to keep rising. Those that can follow these cycles can make an educated guess when is a good time to buy and sell but even if that $500,000.00 house falls to $100,000.00 that asset still exists and just changes hands- it doesn’t disappear like Lehman Brothers, Bear Stearns, Kmart, etc.

The person that has the foresight to buy when an asset is unloved and unwanted often get the best returns over time (BUY LOW-SELL HIGH). Most people get excited when something is HIGH and buy high- experience a correction and sell low out of fear.

I am NOT endorsing buying real estate at this time but I fully expect to be a participant when prices get back to “LOW”. We are NOWHERE near there yet. Gold, silver and many other hard assets ARE LOW and I don’t know how much longer we may be able to buy these assets at a reasonable price. If you have thought about adding hard assets to your portfolio or diversifying your portfolio to include foreign currencies you may want to have a talk with me.

Be Prepared!

Mike Savage, Financial Advisor

2642 Route 940 Pocono Summit, Pa. 18346

(570) 730-4880

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