Weekly Article 06-06-2018
I often like to watch shows that depict the battles of World War Two. When I was younger I used to think it was interesting to watch the strategies used by the opposing armies as well as supply routes being set up and the outcomes based upon better (or worse) planning. These days it just makes me sick to see the disregard for human life that is depicted in these shows. Times change.
What doesn’t change is that those who perceive risks and plan for them make out far better than those who just go along and believe tomorrow will be the same as today. There are also those who have the foresight to see what is taking place prior to others and make plans to take advantage of what they believe will happen in the future.
A lot has been made about the USA far outspending everyone militarily but there are credible reports that many other countries have advanced weapon systems that we may not be able to handle. To me, this is a symptom of fighting the last war.
In World War 2- when it really got going the French counted on the Magineau line to protect them from a German attack. Of course, in World War One that tactic may have worked but in WW2 the blitzkrieg was a new method of attack that made these “lines” irrelevant. Similarly, today, many are worried about the size of standing armies that may be irrelevant today because of the destructive power of the latest instruments of war. Just think if we spent half of the time trying to build up the world rather than tear it down how much better life might be.
Similarly, the Fed and other central banks appear to be fighting the last war. Of course, similar to WW1 and WW2, WW2 was just a resumption of WW1 20 years later. Just like the issues were not settled by the first world war the issues of our economy have not been resolved in the past 10 years either.
In 2008 we had an issue of over indebtedness and the inability for the economy to continue to carry that debt. The obvious answer to a thinking human should likely be “how do we reduce our debt and make it payable?”. The answer by the central banks, however, was to “print” money to give the illusion that the economies actually COULD handle the debt. The outcome? We are deeper in debt than ever and increasing amounts of that “printing” is necessary to keep up the illusion of solvency.
In the last financial battle, the central banks “printed” money, paid interest on existing debt, bought newly issued debt and bought stocks, etfs and possibly other assets. They also provided $16 trillion to the banks in 2009 (GAO) and that number is now $24 trillion. Actually, the Levy Institute, CNBC and Forbes have all reported $29 trillion! That is a trillion a year since 2009 for the banks to appear solvent in my opinion.
Currently, around $7 trillion in bonds globally trade at a negative interest rate. (9 trillion according to the Financial Times on 8-16-2017) That would be impossible in a market where willing buyers and willing sellers set the price of assets rather than a central bank purchasing assets to move the price and either support or drive down prices depending upon the asset.
It is said that the Fed wants to raise rates so that when the next problem arises they would have ammunition (the ability to lower rates) to spur the economy on. To me, this is REALLY fighting the last war. Of course, with all-time record debts we need record low interest rates to support not only the US government but state governments, local governments, and foreign governments who are all drowning in debt. This is what happens when you live above your means for a prolonged period of time.
My question has to be what will reducing interest rates do the next time? It appears to me that by reducing interest rates again there will be an admission that the “recovery” is over and a new problem has arisen. Of course, it would be the same problem just on a massively larger scale.
The “recovery” has been a recovery in name only. This magineau line will likely not hold this time either as, possibly, panicked investors look for a place to hide. More than likely if confidence in our economy is questioned the place people may look for shelter is in real stuff that is needed for living and not financial assets that would always count on someone else to pay or perform.
I believe we also must keep in mind that all actions taken by central banks- which have been working together for years to give this illusion of solvency- have consequences for other countries whether they are intended or not. For example:
Urjit Patel, governor of the Indian Central bank is blaming the emerging market debt and currency problems on a lack of dollar liquidity that is being caused by increased treasury bill issuance (crowding out others) and the reduction of the Fed’s balance sheet- leading to less dollar liquidity. Sorry Mr. Patel but if the Fed sticks to its plans- you haven’t seen anything yet! The bottom line is that a strong dollar can be bad news for emerging market countries that have a lot of dollar-denominated debt. That debt gets a lot harder to carry when more of their local currency is needed to make the payments. The US dollar could certainly be used as a weapon to influence current events. This may even be done unintentionally but that won’t help those on the receiving end.
In Italy, as an anti-Euro party (actually a coalition) is gaining power the European Central Bank used a bit of a weapon of its own. You see, when a central bank IS the market (the only ones buying) they can determine the prices. In an article from Zerohedge on June 4, 2018 “Some Italians wondered if the Mario Draghi wasn’t using a page from the Silvio Berlusconi playbook and allowing Italian bonds to tumble without ECB intervention, simply to “pressure” the domestic political process against the formation of a populist, Euroskeptic cabinet”. Charts later in the article show that, indeed the Italian bonds purchased at this time were at the lowest amounts since March of 2015. What I find interesting is that they couldn’t possibly stop- only slow down!
To me, this is proof that once you go down this road there are no good exits.
As I have said many times in the past- this is the problem with “printing” where central banks not only control the markets but “are” the markets. It appears they are willing to assert their authority when they deem it necessary.
My guess is that this has gone on for so long and gotten so out of hand that the only viable option is to crash the current system-hopefully not like they did in the 1930s with a shooting world war but possibly with some financial weapons.
It appears to me that whatever may take place it would be a good idea to have your necessities of life in abundance, some goods to barter with just in case and an amount of silver and gold would also be a good idea. There are also credible reports that gold may be used to introduce confidence back into the financial system after all of the cards get played out. (King World News)
I believe this is why almost all central banks are reclaiming their gold from overseas, many are buying gold hand-over-fist (China, Russia, etc.) and many are expanding their domestic production where possible. In my opinion you should always NOT listen to what the banks say- WATCH what they do. Many major banks are also loading up with tons of gold and silver- JP Morgan, HSBC, and Goldman Sachs to name a few who have admitted to it. (Seeking Alpha- Goldman Sachs and HSBC buy 7.1 tons of Physical gold 8-10-15)
Mike Savage, ChFC, Financial Advisor
Securities are offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.
Any opinions are those of Mike Savage and not necessarily those of RJFS or Raymond James. Expressions of opinions are as of this date and are subject to change without notice. The information in this report does not purport to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources deemed to be reliable but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. There may be sharp price fluctuation even during periods when prices are overall rising. Precious metals, including gold are subject to special risks, including but not limited to: price may be subject to wide fluctuation, the market is relatively limited, the sources are concentrated in countries that have the potential for instability and the market is unregulated.
Diversification does not ensure gains nor protect against loss.
Investing in emerging markets can be riskier than investing in well-established foreign markets. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices are overall rising. US Treasury securities are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and guaranteed principal value.