It was only a few months ago that I wrote about an event that I though was totally absurd. Argentina, a country that has defaulted on their debt no fewer than 9 times in the past 200 years issued 100 year bonds and the bonds were bought up with plenty more demand than the supply that was issued. At the time I speculated that those “investors” would be lucky if those bonds didn’t default in 10 years or less.
According to the Financial Times $2.75 billion in bonds were sold at an 8% yield. This was in June 2017.
While the bonds may not have defaulted officially yet the writing appears to be on the wall for the “investors” in these securities. (Jorge Piedrahita, CEO of Puma Investments said “When you look back at history, I’m not sure we can find a 20-year period where Argentina has not defaulted”)
Fast forward to today and the Argentinian Peso is in freefall. Over the past few days from April 27- May 4th. The interest rates in Argentina (7 day repo rate) have been raised from 27% to over 40% in an attempt to halt the slide in the value of their currency. So far, these rate increases appear to have done little to stem the tide of losses.
Keep in mind that, as rates rise the value of those bonds fall. Of course, the mantra of many is “hold to maturity and you’ll be ok! True. Too bad for these “investors’ the maturity date is 99 years and 1 month away. That’s a little longer than most people’s life expectancy let alone their investment time horizon.
So why don’t they just intervene in the markets like the Fed or the ECB or the Japanese Central Bank? I believe it is likely that they are but it is having no effect- just like one day it is likely to have no effect when the major “printers” get caught in the same scenario.
As many nations have tried to “print” their way to prosperity, history is littered with examples of what a fools errand this is. Many people remember Weimar Germany but far more recent would be Zimbabwe, Venezuela, Indonesia, almost all of Asia in the late 1990s, Brazil, and now add Argentina to the list that keeps growing day by day.
Every country that has taken from one group of people and transferred wealth to others has seen a decline in living standards across the board. Hard work and thrift get replaced by expediency and dependence on the kindness of elected officials. Look at California, Illinois and New Jersey for that matter- only increasing their debts exponentially have kept the illusion of solvency in those and many other states. An illusion that, in my humble opinion, will rear its ugly head shortly. After hundreds of years of similar outcomes across the globe it is stunning that most people think the “government” can give them something for nothing.
All of the examples that I have listed started out with the “something for nothing” attitude and morphed into “Socialism is great- until you run out of other people’s money”. That happened globally in 2008 and the central banks, through massive debt creation and money “printing” have given us the illusion that a recovery has taken place even though it is easy to see only massive interventions into virtually all markets has been taking place. The scourge of too much debt to handle in 2008 has more than doubled since our last warning in 2008. I believe 2008 SHOULD have been the end of our current economic system but it has been kept on life support until- who knows when.
Many people are pointing out that hundreds of billions are being spent trying to keep US treasury yields low- even though the Fed says they want higher rates. If they really wanted higher rates they would not be intervening in the 10-year treasury notes as they currently appear to be. My guess is that higher rates would cause asset values to decrease substantially. I have said many time – if bonds go- it all goes- stocks, bonds, real estate, etc.
The stock markets appear to me to be signaling extreme weakness and it appears there is large buying taking place when the averages are declining in any meaningful way. A look at the charts and the interventions into these and virtually all other markets are easy to spot. Just yesterday the Dow was down 350 points but actually wound up with a gain after an unknown entity turned the tide in the early afternoon.
While our Fed does not admit to purchasing stocks outright- of course they weren’t going to tell us about the $16 trillion bailout of the banks or where $21 trillion came from that is now missing from HUD and the defense department either the Japanese Central Bank make no ones about it- they buy Nikkei stocks on down days (Chris Martenson) and are the largest holders of Japanese ETFs on the planet.
It appears to me that all of the “information” we are fed is to create a certain illusion. It appears also that it is working since most people seem to have few, if any, cares in the world.
I expect that whenever the tide turns it will likely be abrupt and it doesn’t seem that there is any one outcome that we can count on. This is why diversification is, in my opinion, a necessity at this time and avoiding artificially overpriced assets appears to make sense also.
I believe those with patience will be rewarded going forward.
For anyone who does not have at least a small portion of your assets in metals and hard assets I believe your time for getting them at a reasonable price is getting short. All the signs are out there!
Mike Savage, ChFC, Financial Advisor
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