Weekly Article 12-12-2018
There has been some mysterious action in the stock markets for quite some time now but the recent action that is taking place is off the charts. Just yesterday (12-11-2018) it appeared that the S&P 500 was about to fall substantially when all of a sudden out of nowhere someone (or some entity) stepped in and bought just enough to get the average to where the program traders would buy. It’s amazing the luck that those “managing” the markets seem to have!
The Dow Jones Industrial Average, formerly known by me as a place that didn’t provide much excitement but had a good long-term track record, has been anything but sleepy itself. Moves of thousands of points in a day have become commonplace in the last few weeks. Anyone who has been watching markets for any period of time should know that this could be a major warning as the largest moves in markets typically occur in BEAR markets- not bull markets. Many are stunned when I tell them that the largest gains registered on the DOW took place during the crash that occurred in 2008. As a matter of fact, six of the top ten gainers took place from 9-30-2008 to 3-23-2009 (David Stockman)
The largest one-day gain took place right during the collapse on 10-13-2008 when the DOW rose 936.42 that day. All of this volatility is, I believe, sending a strong message. That is- look into potentially reducing your exposure to stocks. I believe BTFD has turned into STFR.
Bonds have also been showing more volatility than we would normally expect. There are many types of bonds out there but they are all being whipsawed around by traders and machines that are trying to squeeze out any yield they can find. Many passive investors are now dumping those passive funds and heading for the hills. The problem here is that, as redemptions come in, it is likely that the most liquid assets and those with gains will be sold first. This could lead to a decline in the quality of the ETF or mutual fund going forward. This is another reason why leverage is a killer when the tide is going out. I have noticed some bond funds leveraged 50-100%. This means that as redemptions come in those funds may have to sell $200.00 worth of bonds to get $100.00 to pay out.* That makes it that much harder and may force more unwanted selling. *This is a hypothetical example for illustrative purposes only and does not represent an actual investment.
One way to tell if you are holding a fund that is leveraged is to look at the cash position. If there is a negative cash position the fund is leveraged. This leads to higher yields (and more buyers) on the way up and larger losses as the tide turns. I would generally avoid these type of funds as the higher yield will likely not compensate for the additional risk.
There is stress showing up in corporate debt, government debt (globally) and we all know that interest rates rising is not good for bonds because as the yields rise the value of the bonds fall.
Real Estate, the third asset that is being artificially propped up with money from nowhere, is also seeing signs of stress globally. Home prices are some 30% lower in parts of China. In Australia regulators have been warned to prepare “Contingency plans for a severe collapse in the housing market” that could lead to a “crisis situation” in one or more financial institutions. (Zerohedge)
Closer to home, in Canada home prices are falling and across the USA- particularly in the most expensive areas prices are also starting to fall. (Money GPS) It only makes sense. As interest rates rise fewer can afford the monthly payments. I don’t believe you have seen anything yet. I believe that real estate will become a screaming buy at some point and make those with purchasing power very happy at that time.
Meanwhile, quietly gold and silver have caught a bid. While the stock and bond markets are gyrating wildly these two assets have made a nice move higher. Still nowhere near where they should be in my opinion but nonetheless when other assets are falling it is nice to have something that has been relatively stable.
Central banks, major banks and countries continue to add substantially to their gold holdings.
I was listening to an interview and a question was asked that really hit me.
Why do central banks, who “print” money out of nowhere (and charge interest on it) hold gold?
Really, why would they? If you could just “print” your own money you could just do that and let everyone else worry about producing real goods. It appears to me that you would have no need of anything but your printing press- UNLESS you knew all along that this “printing” would ultimately lead to the destruction of the “printed” currency and you would need real stuff to start over with. What if the system of “printing” money is designed to fail and create opportunities for those in charge to buy assets for pennies on the dollar with those real assets that they got for virtually nothing? Let’s face it we have hundreds of years of history that show not ONE instance has money “printing” worked long-term.
Look at Venezuela, the latest victim of money “printing”. It’s not the political system but the illusion of something for nothing that leads to this type of disaster. If you could become rich by “printing” money Zimbabwe, Venezuela, Argentina and Brazil would be the most affluent countries on earth. Too bad that the only ones who make out with “printing” are those doing the printing and charging interest on it. The general population is then left to pay off the debts and clean up the mess. The entire world appears to be on the same trajectory but just at different points.
It appears to me that while we are forced to use their “money” they would rather use something real. Remember, JP Morgan himself said “Gold is money- everything else is debt”.
By the way- it is NOT different this time it’s just that those in charge have better avenues to deceive the many for the benefit of the few. Just go back 40 years. I can remember speaking to my grandfather who lived through the depression.
Today, debt is thought of as good even though it raises the cost of what we are buying over time. In the old days debt was looked at as undesirable. The only way you would go into debt was if you had to. Now people are more than willing to pledge their future earnings for their immediate gratification.
In the old days people were embarrassed to take handouts- today they proudly line up!
With over a hundred trillion dollars in new debt in the last 10 years globally we have pledged our future earnings for millenniums to come. Much of this debt that was issued has been spent and all that is left is the debt and interest payments with no productive enterprise to pay it off.
After most central banks have “printed” trillions of currency and added debts that we can’t fathom my main question is “When we realize that this debt can’t even be serviced without “printing” what we are paying with let alone paying any of it off, who is it that will eat the losses that will eventually come?”
My answer is just about everyone who is expecting to get paid from someone else. That is the main reason why I try to make sure all of my clients and friends have at least some exposure to assets that are not someone else’s promise to pay. Gold, silver and other hard assets are some examples!
Mike Savage, ChFC, Financial Advisor
2642 Route 940 Pocono Summit, Pa. 18346
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