Weekly Article 11-20-2018
As I am writing this there are many who are hypothecating that Thanksgiving week is usually a week in which the major stock markets rise historically. As of Monday that looks in jeopardy. I think I may have been on target last week when I mentioned that this market action appears to be a managed implosion.
It appears to me that the world economy is slowing more than we are led to believe and this is just with central banks slightly letting up their pressure on the accelerator of the economic engine.
I pulled up a few headlines (mostly NOT mainstream because they don’t fit “the story”) that should give all of us reason to question the “all is well and it’s time to buy” story.
#1 From ZeroHedge on 11/16/2018 : Global Auto Industry Collapse Continues As October EU Data Shows No Relief. “Deliveries were down 7.4% in the EU and the European Free Trade Association in October from the year prior. This adds to a 23% drop that occurred during September according to data from the European Automobile manufacturers Association”. With interest rates rising in the US and China having economic headaches throughout it appears that the three largest markets for autos are turning down at the same time.
#2 Also 11/16/2018 Zerohedge : IMF Sounds Alarm On Leveraged Lending. I have written about this in the past as many investors, starving for yield, are allowing many companies that traditionally could be called impaired to borrow money at obscenely low rates. The record for these type of loans was in 2017 at $788 billion- higher than the previous record of $762 billion in 2007. So far this year globally $745 billion has been issued. The IMF also states that “Underwriting standards and credit quality have deteriorated. In the United States, the most highly indebted speculative grade firms now account for a larger share of new issuance than before the crisis”. “This year, so-called covenant-lite loans account for up to 80% of new loans arranged for non-bank lenders”. This means LESS protection for the investors in times of turmoil.
#3 Zerohedge 11/9/2018: Goldman Calls It: “Stocks May Be About To Enter A Sustained Bear Market”
At the same time Bank of America announces that even after the recent corrections that stocks remain expensive in 16 out of 20 metrics they use to value them.
#4 Jeffrey Gundlach (founder of DoubleLine Hedge Fund and aka “bond king”) has said that “both corporate and high-yield bonds are at or close to their most extreme levels of overvaluation historically, based on DoubleLine’s proprietary methodology.
Remember the adage “Buy Low- Sell High?
Paul Tudor Jones, another Hedge Fund Manager opines that as the Fed increases rates it will be like a stress test on the entire corporate credit structure.
Actually, we don’t have to look any further than our own iconic US brand- General Electric and their financial woes to see the problems we may be facing. GE WAS a component of the DOW but was replaced by Walgreens in June of 2018. This is a company that produces many things that are a part of our life and has made our life better in many ways. Unfortunately, they have morphed into a company that has lost its way and is being crushed by being over-indebted and having outsized legacy costs.
This could be said of many, many well-established companies today.
So far, we have rising rates, rising debts, and a slowing economy which could likely mean less ability to service the growing debt.
Another piece of information that leads me to believe that the world economy is slowing is when the largest shipper in the world A.P. Moller-Maersk announces that global demand has plummeted to its lowest level in two years. In addition, rates for container ships dropped 27% from a multi-year peak and raw material vessel rates have fallen 10% from a 5-year high. Keep in mind that the real impact of tariffs will take place in 2019 leading me to believe many orders are being filed today to beat the deadline. And we still see contraction. What will it look like in a few months?
So let me get this straight. We need more and more debt to keep this debt-based system going. Without it, it could collapse. We need more economic activity to be able to service the increased debt but economic activity is slowing. The central banks, likely realizing that if they continue doing what they are doing, and conjuring up “money” out of nowhere and buying assets (to give the illusion we could actually pay for it now!) could destroy the base of their power- “printing” money. This would be because at some point the small group of people who recognize what they are up to will grow to a majority and the jig will be up.
I believe those that are looking at this situation and are honest with themselves have to believe that something is drastically wrong and that the economic numbers we are being peppered with daily don’t seem to add up. I a situation such as this I believe it is imperative that you plan to be able to weather the approaching storm. My best guess is that having real assets is a good place to start. Have cash, have food and water, have some precious metals if you can.
If we look back at history we see that those who were prepared were offered opportunities that we could only dream of today. We may just be at that point in time when our opportunities will reveal themselves.
Mike Savage, ChFC, Financial Advisor
2642 Route 940 Pocono Summit, Pa. 18346
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