Welcome to the 04-04-2018 update from your Pocono Summit Financial Planner and retirement planner, Mike Savage. Today, Mike talks about the current volatility of the trade market and the economy at large.
As I am writing this on Wednesday morning anyone watching the markets is aware of the continuing volatility that is occurring. One important point to make here is that the markets usually take the stairs up but take the elevator down. In other words, it generally falls faster than it rises- particularly as the trend changes as it appears it may have now done.
I keep hearing how the tariffs and rumors of trade wars are the reason for the indexes falling recently. This seems to be the story that the financial game shows are told to tell because every time I turn around this is the story being presented. While these two threats are certainly not bullish for stock markets I doubt that these rumors are the main reason for the volatility we are seeing today.
Today we are seeing massive bond buying in the US Treasury market to keep interest rates from skyrocketing. We are seeing massive stock buying anytime the markets appear to be in trouble. A few weeks ago the Dow was down over 1600 points and in an instant recovered 500 points. There aren’t too many entities out there that could buy in such size and appear to not worry about price or value.
We are seeing the 3 month LIBOR rate rocket higher- this is like a draining of liquidity just like higher rates in the Treasury market does here in the USA but on a global basis. It also appears to suggest that the banks are trusting each other’s ability to repay short-term loans less and less as they are charging higher interest for those loans which appears to reflect higher risk.
I also believe that many in the world are reading the tea leaves and seeing that Russia is setting up a free trade zone in Eurasia, China has the One Belt One Road trade zone, and China is trading oil denominated in their currency -the Yuan.
The world appears to be aware that we have been totally irresponsible in our handling of the world’s reserve currency and are looking for alternatives to the US dollar to hold assets in. Just maybe the rest of the world has stopped investing in America and is investing elsewhere where there might be more opportunity for growth and less chance to be bullied by our government through sanctions, tariffs, etc.
Maybe this is why the stock market averages are dropping by jaw-dropping amounts because of a lack of real demand and then rallying as some entity steps in to prop it up. Just as I have been writing for a long time- stocks, bonds and real estate are being artificially propped up- and in my opinion it is obvious to anyone who cares to look.
In the meantime, gold and silver continue to be hammered down any time there is a threat that price will rise and give people an idea of what is really happening to fiat currencies- which is that they are likely being “printed” into oblivion. This seems to be true for virtually all developed currencies as these countries appear to be trying to give the illusion that all is well by growing debt and currencies to pay current bills and continue to issue more debts to continue more spending that is not really affordable.
Actually Central banks, particularly the ECB, by buying European corporate debt has skewed rates so bad that you can actually buy a European junk bond and get less of a yield than a US 10 year Treasury note. This is not only ridiculous but, in my opinion, extremely dangerous. There will likely come a day when these companies may not be able to carry their debt at any rate.
It is concerning to me that many bail-ins have taken place in Europe over the past year and there is virtually no news of this in the USA. To me, that shows me that someone doesn’t want anyone to have any idea that a bail-in is a possibility. If you go to the FDIC.gov website you can get a lot of information!
I hear very little about the derivatives being worse (higher) now than they were prior to 2008. That a major bank in Europe has derivative exposure that is larger than the entire world’s GDP and many others are likely not too far behind.
It is concerning to me that $24 trillion has been given to the banks since 2009 to keep them in business (GAO) and there is virtually no reporting of it. It is also concerning that $21 trillion is missing from the Department of Defense and HUD (Office of the Inspector General) and this is not deemed to be worthy news.
I guess since Russia didn’t “print” the money there is no story!
I also guess that the rest of the world DOES get at least some of this information and just may be taking steps to protect themselves in the event that the US dollar has a hard time going forward.
Are you doing the same? Or are you taking the “all is well- I hope!” stance?
Buy, hold and hope looks like a poor strategy now and going forward. Assets that are being artificially propped up will likely find true value at some point and those assets being held back will likely find their true value also when the charade comes to an end. It’s too bad we can’t know when that is but my guess is that it is not too far off.
Mike Savage, ChFC, Financial Advisor
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