Weekly Article 12-20-2018
For months I have been saying that the global economy has been slowing markedly. Of course, because stock and bond markets were adequately propped up by central bank buying, and corporations buying their own stock back, most people chose to ignore plenty of information that was out there indicating that the rosy massaged numbers were not painting a clear picture.
Of course, why listen to me? I am just a small financial advisor in the Poconos. However, the chorus is getting much louder in proclaiming that things are financially amiss and that some caution is warranted at this time. Those doing the warnings now are no other than the BIS (Bank of International Settlements aka: The Central Bank of Central Banks), The IMF (International Monetary Fund) and many hedge fund managers.
In March of 2018 the BIS, according to a Bloomberg article on 3-11-2018, said that the China Banking Crisis warning signal was flashing red. Of course, banks provide liquidity through loans. Since that time the Shanghai Index is down 25%. According to BusinessInsider.com the BIS has also issued warnings for Canada, China, Hong Kong and Switzerland. On March 12, 2018 Business Insider.com also reported that the BIS issued an alert for Australia- mainly because of them being over-indebted and having a housing bubble that appears to be in trouble.
More recently, the IMF’s Christine Lagarde mentioned that global debt, public and private is 60% higher than in 2008. In addition, in the IMF’s Annual Economic Outlook it warned that “large challenges loom for the global economy to prevent a second great depression”. “The huge rise in borrowing by corporates and governments at cheap interest rates had not shown up in higher levels of research and development or more general in infrastructure.” In other words, all of this debt has been used, for the most part, to financially engineer stock prices higher by buying back shares and paying dividends that may have been paid for with debt rather than earnings. Now the companies are saddled with an extreme debt load and little to show for it but some great bonuses in the C suites.
Now that the liquidity spigot is being dialed back it is likely that many of the financial shenanigans that have taken place in the last 10 years may be coming to an end in the near future.
I don’t want anyone to think that the buybacks have stopped as Johnson & Johnson just announced that they will be buying back shares shortly and just in the third quarter alone, according to Motley Fool.com Qualcomm bought back $21.2 BILLION of their own shares, Apple bought $19.4 BILLION of their own shares and Oracle, Wells Fargo and Cisco bought back $10.3 BILLION, $7.4 BILLION and $5.4 BILLION respectively.
What would their P/E ratios be had that not been done? How much lower would the share prices have sunk without all of this faux demand?
Finally, just today Federal Express announced a cut in their annual forecast because “Global trade has slowed in recent months and leading indicators point to an ongoing deceleration in global trade near-term.” According to Ravi Shanker, an analyst at Morgan Stanley, “We recognize that global growth has slowed but we are very surprised by the magnitude of he headwind, which is what might be seen in a severe recession.”
Without all of the “printing” that has taken place and debt creation over the past 10 years a full blown depression would likely have had to be recognized long ago.
As I am contemplating what the next few months may look like I believe we may be seeing the beginning of the end of this fiat currency experiment. Many times I have said that the interventions need to keep getting bigger and bigger to have the same stimulative effect.
As I wrote years ago, I said the central banks, if they stayed on the same path, would own virtually all assets and at virtually no cost. I believe we are getting close to the point where many are waking up to the fact that the to 1% of 1%ers are getting awfully wealthy at our expense. This is obvious now globally where the “regular folks” are having a hard time surviving let alone keeping the lifestyles that they became accustomed to throughout their lives. Hence the riots spreading across the globe.
This, and the fact that the ECB (European Central Bank) already owns a large portion of European corporate debt and sovereign debt – actually so much corporate debt that there is not much left to buy leaves the central banks with little room to maneuver.
I assume that the $21 trillion discovered “missing” from HUD and the Dept. of Defense by Dr. Mark Skidmore Phd at Michigan State University must have been spent in stealth- buying assets?
The Japanese Central Bank has bought all Japanese Government bonds in the past 3 years and, as of last year owned 70% of all Japanese ETFs.
I have asked in the past “If the central banks buy all of the assets what will they do then? “Print” more money and buy the same assets again?
These people are not stupid. They know that the numbers are stunning and cannot be maintained. The debts wrung up in the past 50 years or so- and the last 10 in particular, mathematically CAN NOT be paid with the currencies having anywhere near the “value” they have today.
It appears to me that the central banks have arrived at a place (which I said they would come to years ago) where there are no good options.
Keep “printing” and buying assets and the value of the currency may become non-existent and the value of what they bought could also become worthless because there is no one who can buy it. On the other hand, they could stop this game and let the markets determine the actual value of assets- likely a stunningly lower valuation for virtually all paper assets but particularly those being artificially propped up like stocks and bonds.
On the other hand, as gold and silver have been artificially suppressed by the same actors propping up other assets, this too will likely end as the credit markets dry up as they have been in the past couple of months. Without the free “money” the rigging of markets becomes a lot harder.
While we can’t know what the central banks may do next- what could you possibly put past a crowd that actually sold negative interest rates and conjur up “money” out of nowhere and buy real assets with it?
The only solace I have at this time is that if they keep “printing” it is likely that gold and silver will have a price that no on can afford in paper currencies. Just look at Venezuela where it takes over 3 MILLION bolivars for a cup of coffee. 10 years ago it was 2 bolivars. Today, an ounce of silver buys food for a family of 4 for a month in Venezuela.
If they stop the “printing” and propping up of asset prices it is likely that the credit system will fail (there are signs it may be starting already) and, as people don’t trust others liabilities as they see defaults rising they will likely want payment in real goods like necessities of life and real money like gold and silver.
Like I said, the central bankers are not dumb. Why do you think that the central banks whose occupation is “printing money” are all scrambling for gold and silver along with countries and many major banks?
Obviously, they know something is up.
Mike Savage, ChFC, Financial Advisor
2642 Route 940 Pocono Summit, Pa. 18346
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