Weekly Article 07-26-2018
The self-proclaimed “smartest man in the room” Mario Draghi says the end of European bond buying will be a nothing-burger. Of course, what else CAN he say? The idea is that interest rate increases are on hold until at least next year and the QE bond buying program will end at the end of this year.
I have a few questions:
Who in their right mind would buy European corporate debt at current levels?
My answer is nobody who couldn’t “print” the money because all you get is return-free risk. Of course, if the money is “printed” from nowhere and at virtually no cost whatever the “asset” will be more than what you started with. Anyone who has earned their money will likely be a little more concerned with what the performance over time will be. In a best case scenario the almost limitless credit growth that has been going on in Europe and indeed across the globe will likely drastically slow down with the major buyer now on the sidelines. In a worse (not worst) case scenario bond yields could rise uncontrollably and not only stifle new issues but reveal which companies were being artificially propped up. Those that were being artificially propped up could go bankrupt. This could lead to far more than a bond market problem. It could lead to far higher unemployment and a drastic increase in social spending along with lower tax receipts across the board. (Higher deficits and possibly a new QE program to “save the day” again).
Who will be the buyers of European Sovereign debt?
Many of these countries balance sheets are a joke. It appears there is no way the debts they owe can ever be repaid. Up until now, with Greece as an example, this debt has been being paid with increasing debt. Not likely a good long-term plan. The only question in my mind is when, not if, this whole illusion is exposed. Would you buy a bond that guarantees a long-term loss? If not, rates would have to rise substantially in this space also and could lead to MANY problems for those governments. I believe the IMF will likely show up with more loans.
Sorry Mario- NOT buying it!
On the US stock side it was reported by Bloomberg on June 4, 2018 that the FAANG stocks have become 27% of the Nasdaq. This means that how these stocks go the “market” goes. Actually, without these few stocks (which are being bought up by central banks) the “markets” would already be showing major stress.
I believe this is why it is important to note that Facebook-a component of the FAANG stocks saw their share price drop 20% because of “weak” earnings and expectations of higher expenses. (Fox Business) The disappointment was that users rose 11% to 1.47 billion vs. expectations of 1.49 billion and 2.23 billion active users vs. the expectation of 2.25 billion. They also cited 50-60% increase in expenses. The point I am making here is that these stocks are priced for perfection and any disappointment, no matter how small, can be a big deal.
Of course, anyone worried about the Zuck’s net worth- he sold $3.5 billion in Facebook stock since March 2018 (Bloomberg). Overall, corporate insiders sold $4.1 billion at Facebook. Look at what they do- not what they say!
I will also leave you with one more point. I cancelled my Facebook 2 months ago and LinkedIn before that. I am still getting requests on LinkedIn and my daughter logged into my computer to go on Facebook and my CANCELLED account was still up and running. I guess I am still part of the “active users” even though my account was supposedly cancelled 2 months ago! How many others are counted as active when there is actually little, if no, activity.
I also saw a chart on Money GPS where the only buyers of stock in 2018 were corporations buying back their own stocks. Retail investors and hedge funds have sold more than they have bought. When the liquidity runs out for these firms to be able to do this who will step up next?
While stocks, bonds and real estate remain, in my opinion, at dizzying heights hard assets such as oil have been getting a little stronger lately. It seems that only the metals (gold and silver) are being kept under wraps. Russia has sold virtually all of their US Treasury notes and bought gold. Many countries are still accumulating massive amounts of gold along with major banks. Still, the paper price goes down in US dollars.
My opinion is that this is manipulation in its worst form. Of course, all assets appear to be manipulated but most are to the upside. As Dr. Paul Craig Roberts has said- When the supply is static and the demand is increasing the only way you can have lower prices is manipulation.
I have been asked why I would want to own an asset that is played with like that. My reply remains the same. Every fraud contains the seeds of its own destruction. I don’t know when that day is but many will be surprised at the violent price action of all of these assets that we track.
The reversion to the mean should be a stunning sight.
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 n ot 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.