Weekly Article 05-09-2018
In an interesting interview on USA Watchdog Nomi Prins, a best-selling financial author, stated that, since the financial crisis began central bank’s balance sheets have ballooned to over $21 TRILLION dollars globally. To me, this means that a huge amount of money from nowhere was conjured up, assets were purchased, and virtually all price discovery in most markets has been obliterated. That will happen when $21 trillion of demand from nowhere shows up. Similar to someone who wins the lottery- these people didn’t work for this money and they don’t have the respect for it that they would have had if their blood, sweat and tears went into earning it.
Who in their right mind would buy a negative-yielding bond which guarantees a loss if held to maturity? My guess is only someone who got the “money” for free and whatever the value – it’s more than they started with. Absurd!
This has been going on now for quite some time and the numbers are getting larger and larger- as are the consequences of these actions. In the latest example of “you can’t fix a debt problem by going deeper into debt” Argentina has agreed to an IMF bailout. This will allow them to have a short-term solution to their debt problems by adding new debt to pay interest on the old debt and incur new debt to continue spending.
Of course, as a condition of this IMF “bailout” Argentina will likely see it’s national assets plundered similar to what we have seen in Greece and many other countries over the years. For those who don’t pay attention, the IMF steps in when nations get in trouble with debt and can’t repay. They set up a line of credit and eventually force austerity on the said nation after they get in trouble again- which they all seem to do because- you can’t fix a debt problem by going deeper into debt!
All of this “printing” is causing the weakest hands to be exposed as we are seeing debt and currency problems in places like Turkey, Argentina, Venezuela, Zimbabwe, Indonesia, etc.
So, why is this important? Ms. Prins made one more extremely important point- one which I have been making for years but she just recently released an entire book about it. The point? The only way this collusion between central bank continues to work is if they all work together. In reality, as the Fed has supposedly pulled back in their “printing” the ECB and Bank of Japan are in hyper-print mode so the net effect is still stimulative. Not that I believe the Fed has stopped at all anyway. Add to that the largest buybacks in history by American companies in the first quarter of 2018 and the monetary spigot has continued to be wide open.
What is important, in my opinion, is that with all of this continued intervention in both stock and bond markets it appears that this stimulation is preventing sharp revaluation in both stocks and bonds. I see interest rates under constant pressure to spike higher and major interventions to stop it. I see stock markets showing major weakness and major buying when technical levels are threatened. This is in the USA. I am sure that in Europe and Asia there is similar action taking place as all major central banks are in on the “print and buy real stuff” party.
With intervention in these markets at these levels one might expect that bond yields would be near all time lows and stock and bond prices near or at all time highs. A year ago that was true- not so much today. It appears that historical interventions are not enough to keep the new all-time highs coming these days.
As economic reality starts to set in each country will have its moment of truth that shows up. At that time I think we can expect the politicians to do what politicians do and make sure that they take care of their national interests to stay in power and not have civil unrest. This may be the moment of truth when each country does what is best for them and either a trade or currency war takes place.
Looking at national balance sheets it is only a matter of time before ALL developed countries are forced to deal with being over-indebted and unable to even pay the interest due without issuing new debt and reducing budgets for virtually all other spending. Looking at many US states it is easy to see an unfolding problem as many municipalities and states are reducing services, putting off paying bills and going deeper into debt just to fund pension obligations. There are many more problems that are on the horizon like aging infrastructure and an aging population.
While many will ask when this will all play out I will give my usual answer- I can’t believe it’s taken this long so I won’t comment on that. I will, however, put a few thoughts that the IMF has on this issue out there.
All of these quotes come form “A Bumpy Road Ahead” IMF April 2018
“Although still-easy financial conditions support economic growth in the near-term, they may also contribute to a buildup of financial imbalances, excessive risk taking, and mispricing of risks”
My take: This has been happening since 2009. I believe we are nearer to the end than the beginning.
“Financial Markets Remain Vulnerable To An Inflation Surprise”
My take: While we hear from those in charge they want higher inflation I am seeing massive inflation in food, gasoline, healthcare, taxes, transportation, etc. I am surprised already!
“Growth in less liquid Bond ETFs may raise Financial Stability Concerns”
My take: I have mentioned numerous times about unusual leverage in many ETFs that many would assume to be reasonably “safe”. The use of leverage undermines that theory and may pose risks because of the supposed liquidity of the ETF and possible illiquidity of underlying assets in the ETF basket. Selling may beget more selling.
“Increasing Use of Financial Leverage May Amplify Risks” “Sharp price declines can lead to investor runs and fire sales of liquid assets to cover redemptions and margin requirements”
We saw it in 2008 and will likely see it again since the leverage has increased substantially since the last time.
“Equity valuations remain expensive”
For anyone who has ever heard of “buy low- sell high” the IMF is giving you a clue that anyone buying now is not buying low. Of course, there are exceptions to every rule but overall stocks remain in nosebleed territory and, in my opinion, should be bought at a better price.
“Corporate Bond Valuations are stretched and credit quality is deteriorating in risky segments” “Signs of overheating are evident in the leveraged loan market”
In an attempt to get better yields investors are basically throwing caution to the wind and are lending money to firms that, in normal times would have to agree to far stiffer terms if they could get financing at all. This has led to many zombie companies that don’t have enough cash flow to pay existing debt. Look out when it is about to mature.
While the IMF doesn’t give any timelines they do highlight the many risks that litter the entire monetary system that we are in.
Of course, the financial game shows are telling us that inverted yield curves don’t matter this time- just like house prices only go up! By the way, England has an inverted yield curve and the USA is on the cusp of an inverted yield curve. They’ll also tell us that there are SO many jobs they just can’t get filled as company after company is going bankrupt and retail spaces are turning into modern day ghost towns. How many people do you personally know who can’t find a decent job- at any age?
How many of you out there want higher prices for everything?
These people remind me of Baghdad Bob during the Iraq war!
Don’t wait to prepare until the planes are overhead- it will certainly be too late!
Mike Savage, ChFC, Financial Advisor
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