Weekly Article 11-30-2018

I have written many times that I consider the stock and bond markets to be “fake” because there is no real price discovery (a willing buyer and a willing seller determining a fair price for the risk being taken) but instead massive money creation by the world’s central banks. This causes massive price distortions which have been propping up asset prices- mainly of bonds, real estate and stocks.

I have also written that each action has to keep getting larger and larger to get the same results. This makes me wonder if we are seeing a slow deceleration around the globe to deflate this bubble in a way that is least detrimental to all of us going forward. Another question I have to ask is if it could possibly work.

Yesterday (11-28-2018) our Fed chairman Powell came out and led us to believe in his speech that we may be closer to the end of the rate increases than we may have thought right up to the time of the speech. It caused the Dow to spike 600 points and all major averages to have a great day. This is likely because many participants are also aware how important cheap money is and how rising rates may spoil the bull party that is one of the longest on record. It also could have been a massive short squeeze.

More important to me is what he DIDN”T say. It is not only rate increases that could derail any rallies in the stock, bond and real estate markets but there is also the reality that the Fed is still expected to reduce its balance sheet by $600 billion in 2019. So much for larger and larger interventions. This could lead to serious headwinds for all of these markets and I believe we are seeing stress in the real estate market which is cooling off quickly right now and we are seeing the pressure in both stock and bond markets also. There are obvious problems in the auto market also at this time which is apparent in the news stories of the day about massive layoffs in that industry.

Another area where there may be contraction is in bank lending. As rates rise demand for mortgages and refinancing decreases- as we have been seeing. This is another form of money creation in a way. Because of fractional reserve banking the banks can create additional spending power out of almost nothing. They need to keep a small fraction of what they lend out on hand and the “money” can be lent out and spent into the economy. Don’t discount what a tailwind this was in the past few years.

As stocks have been in a bear market in most of the world for 2018 I also can’t help but wonder when trillions of dollars are gone in a puff of smoke after many global markets have fallen 20% or more just this year how that might affect liquidity going forward. When portfolios are up many feel more confident buying new assets. Some of the smart ones may take profits and buy other assets or necessities. When there are losses there may not be the ability to buy anything extra if the investor wanted to anyway.

Not only are there signs in the stock and bond markets that there is stress in the system which is showing up in massive volatility in both stocks and bonds but also that many iconic companies are being crushed under the weight of the debt that has been built up and are forcing layoffs, corporate restructuring and asset sales to try to survive.

Just 2 days ago the CFO of United Technologies stated his company was going to focus on DELEVERAGING and not stock buybacks. This could be a signal that, as the tide goes out, many companies that have done share buybacks to temporarily lift their share prices- the KEY WORD here is temporarily- and usually for reasons to enrich the corporate hierarchy mainly- and as a secondary outcome shareholders at the time of the buyback.

When share prices fall, for whatever reason, the debt that was used to fund the buyback remains, the value of the purchase is reduced and the company may be exposed to reduced profits going forward because of the headwinds of the debt going forward.

All of this money creation and asset purchases feel good on the way up but when the trajectory changes there can be many casualties that take place in a short period of time. The debt binge FEELS great until the bill comes in. I believe it is in the mail and may arrive any day.

I have also written numerous articles about how, with the same conjured up out of nowhere “money” financial instruments are created to keep the price of metals- particularly gold and silver contained to the downside. So far it has worked like a charm. I also believe that this trajectory is about to change- maybe in a big way.

Keep in mind that while real estate is a real tangible asset the price can fluctuate a lot. My guess is that real estate will offer a compelling value in the near future but anyone who can wait a while should because prices will likely be far lower in the not too distant future.

Stocks are pieces of paper that show ownership in a real asset. The problem here is that many don’t look into what the finances of the underlying companies are. Companies with a lot of outstanding debt may get hurt badly in the next downturn. It is at least likely that a company with low debt ratios would be more likely to survive a severe downturn and would likely perform better even in more normal times.

Stocks, even with the recent corrections, are historically overvalued. I also believe that many of our iconic companies will be great bargains at some point in the future but remain too expensive to try and get good long-term gains at these current prices. Patience is key!

I believe that if central banks were not buying all sorts of bonds rates would be exponentially higher. While I have often said that the bond bubble is the last thing central banks can allow to burst there are many signs that the 35 year bond bull market has ended and that higher rates (lower bond prices) are inevitable and the only questions I have are how high may they go and will it be a slow process or a drastic yield spike all at once. In either case it appears to me the easy money has been made in bonds and this is a great place to remind everyone that past performance does not guarantee future results. In other words, this market may be changing right before our eyes. Of course, there are places in the world where both stocks and bonds may be a buy right now but in the USA and most developed nations I believe that bond yields in particular have a whole lot more room to rise (causing losses) than to fall (causing portfolio gains).

Finally, there is gold and silver. They are no one else’s liability. They carry no debt. They have been used as money since biblical times. Many say “they just sit there”. With gold, that may be true but silver is used in just about every modern convenience we have. Computers, cell phones, solar energy, etc.

Keep in mind that, as gold just “sits there” it is up 97% against the US dollar since 1971 with most of that gain coming in the last 15 years. Gold was $35.00 per ounce in 1971. It is $1225.00 now. It was $250.00 in the year 2000 and $300.00 in 2003.

With stocks, bonds and real estate at near all-time highs and gold and silver in major declines which makes more sense to buy at this time?

I always remember the saying “Buy low, sell high!” What gives you the best opportunity to execute that at this time?  I know what I am betting on!

Be Prepared!

Mike Savage, ChFC, Financial Advisor

2642 Route 940 Pocono Summit, Pa. 18346

(570) 730-4880

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.

Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your original investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

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.

Real Estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

Diversification does not ensure gains nor protect against loss.