Weekly Article 03-06-2019
I have been saying for a while now that, since we saw what we saw in December in the stock markets around the world, it appears that my theory that once you start “printing” and buying assets the longer it goes on, the harder it is to stop, is confirmed. As a matter of fact, since this has been going on for 10 years now, the partial attempt at pulling back on the throttle unmasked what has been taking place.
Without continued massive credit growth, the system as we have come to know it, cannot exist. Any rise in interest rates or lowering of stimulus (conjuring money up out of nowhere and buying stuff) will likely lead to a massive selloff and re-pricing of virtually all assets.
Keep in mind that Japan, the ECB, Sovereign Wealth Funds and other central banks were continuing their massive “print and buy” schemes throughout. Even with this massive support underneath the stock and bond markets they were in distress because the Fed was starting QT (Shrinking their $4 trillion balance sheet). To me, this shows that it is already an all-hands on deck scenario. This also means to me that we may be nearing the end.
As the markets fell some 20% globally the Japanese Central Bank stepped up and said that they may have to “print” more even though they have a balance sheet that holds over 561 TRILLION YEN as of 2-28-2019. They still think “MORE” is likely necessary. Soon we may be talking about a Quadrillion! Still think they have a chance to make this work?
The ECB is again floating the idea of buying corporate debt again as they had stopped for a while- there is speculation that they couldn’t find anymore European corporate debt to buy because they had bought so much already. Of course, there are likely no other buyers because anyone who had to earn the money they were using to buy the bonds would want a better return for the risk being borne. Money you can conjure up from nowhere can buy ANY asset and have more than they started with so there is no surprise that asset prices get so out of whack. This will likely lead to a massive re-pricing at some point as the market will ultimately do its job and find true value for all assets.
China has trumped them all by injecting a shocking amount of new “money” into their system with over $481 billion of new debt added just in January of 2019. (CNBC) This seems almost desperate to me.
Even Norway had their Sovereign Wealth Fund buy $185 billion in stocks just in the fourth quarter of 2018. By the way, they own over 1.4% of ALL listed companies according to Forbes. Last year the fund lost 6.1%. What do you think may happen if we get a REAL correction?
Here in the USA there is now talk of QE being used as not just an emergency tool but a tool to be used anytime there is weakness. Of course, I don’t believe that option was ever off the table. It should come as no shock to anyone that as the market fell the 6 major banks along with Treasury Secretary Mnuchin went into action to prop it up.
You may wonder why it is apparent that this is what happened. After a meeting on December 24th.- the worst sell-off in December ever- the market rose for almost 2 months straight. In the meantime private investors moved over $500 billion OUT of the markets while they were rising relentlessly. That could ONLY happen if others (central banks and banks) were purchasing FAR more than what was being taken out.
This charade has allowed many to believe that this pullback may have been a “glitch” of some kind. In reality, anyone who is looking at this clearly should be able to see the writing on the wall. They will likely not stop until fiat currencies are no longer trusted.
As the authorities attempt to keep stock and bond markets levitated with trillions of dollars, yen, yuan, pounds and euros from nowhere the real economy is choking on the massive debts that have been added in the last 10 years.
I keep hearing about trade wars, Brexit and all of the other stories that we are being told 24/7 on the financial and news game shows but my belief is that the global slowdown is being caused by everyone simply having TOO MUCH DEBT. This goes for individuals, corporations, municipalities, states and national governments.
It appears that even with all of the support by central banks the real economy is rolling over. It is apparent that retail is struggling. This shows me that people have less disposable income. Auto loan delinquencies are at record highs- even higher than in 2008! Student loan defaults are at all time highs. Real Estate prices are falling in many places and you may not have seen anything yet.
Many of us aware of the unfunded pensions and massive debts of cities and states across our country and the over $22 trillion in debt that is admitted to by our government. Others are also aware of off-balance sheet expenses that could be as high as $200 trillion (Social Security, Medicare, Prescription coverage, etc.).
While all of these expenses are like dying by a thousand cuts and the patient may survive for a while there could be an injury that could cause an immediate cessation of economic life as we know it.
Corporate Debt. I have said it before that I believe it would be a State bankruptcy or a series of corporate defaults that may end this current stability that we have seemed to enjoy for the past few years. Both of these types of entities have been binging on ever-increasing debts but unlike the Federal government they can’t conjure up money to pay the bills.
How close could this be?
The BIS (Bank of International Settlements- the central bank of central banks) is warning of a “market crash risk and looming fire sales once the BBB downgrade avalanche begins”. Currently, there is $6.4 trillion of investment grade debt. A full 60% of investment grade in the US and 50% globally of debt now resides at BBB, the LOWEST rating available to be investment grade. (1) A downgrade would push these entities into non-investment grade and would force many entities like mutual funds, pensions, etc. to sell because they would no longer meet the requirements for being held in these funds. This would also lead to higher refinancing costs for these companies going forward and could lead to many zombie companies (those that cannot service the interest without new debt) being exposed. In other words many may default. Keep in mind that, as corporate bonds implode, the first casualty will likely be the stock as stockholders are LAST to get paid in a default.
This could lead not only to a no-bid scenario in the bonds but also in the stocks. Would the central banks step in and buy them up to stem the tide? I wouldn’t put anything past them but that would lead us even closer to “THE END” because, as I have said before, once they buy up everything what are they going to do- “print” more money and buy what they already own again?
While the “printing and buying” may appear to have no end date, the end date could possibly be the day many corporations default on their debt and its stock loses massive value because of the appearance of insolvency. Not only will the first offenders be impacted but many will likely be wondering “Who is next?” causing the risk of contagion. This bears watching.
Just a few familiar names that have a BBB rating:
Ford Motor Co., General Motors, CVS, Credit Suisse, AT&T, Verizon, Western Union, Kraft Heinz, Dow Chemical, GE, Deutsche Bank, Goldman Sachs.
Amazing that Goldman Sachs, according to the GAO, got $814 billion in 2008 to bail them out and in 2019 are barely investment grade. Maybe things aren’t quite as “fixed” as we would like them to be.
In the meantime let’s forget about the rigging of the gold and silver markets so that those in charge can load up at bargain prices and focus on the fact that they ARE loading up on gold and silver and it is likely because they know that these assets are nobody else’s liability. They won’t have to worry about counterparty risk and they will be holding an asset that will likely trade counter to what stocks are doing. It is a non-correlated asset.
I believe the central banks are painted into a corner. It is only a matter of time before a reset of all asset prices in my opinion. Would you rather be holding assets that are being artificially levitated or an asset that is being artificially suppressed when the reality is exposed?
Mike Savage, Financial Advisor
2642 Route 940 Pocono Summit, Pa. 18346
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