A few weeks ago I wrote that I didn’t understand the allure of stocks when the economy is crashing around us. Since then, despite crashing fundamentals and a crashed economy, the “markets” have overall risen thanks to the trillions in stimulus “cash” conjured up by central banks and assets being bought directly or through their intermediaries.

Trading volumes have been dead low and that makes their propping up of assets that much easier- for now.

Many people, because of central bank induced low interest rates, have been forced into stocks hoping that the dividends will make up for a lack of interest income available in traditionally safer assets like CDs, fixed annuities and other products that could throw off income and also preserve your principal.

Now the time has come for yet another beatdown of the bloodied small investor as not only are rates dead low but now the dividend spigot is getting turned off at a time when there are few other places to generate income.

We are just a month or so into this crisis and already a record 81 companies have suspended or cancelled dividend payments. For a little perspective between 2010 and 2019, 55 companies suspended or cancelled dividends. You read that right. 47% more companies stopped paying dividends in the last 30 days than in the last 10 years.

In 2009- the last record year for dividend suspensions 63 companies stopped paying dividends over a 12 month period.

My guess is that this is just the tip of the iceberg. Many companies were going deeper into debt to keep the illusion of strong earnings and stability alive. Let’s not kid ourselves- it also kept the stock price propped up because many bought the stock mainly for the dividends as interest rates crashed.

Today, we have companies that have no idea what future earnings may be- just that they will be a LOT less. For most companies not selling basic necessities there is no real timetable of when things may get back to somewhere near normal. The ONLY reason to own most stocks would be the expectation that the Fed will engineer the price higher and that you can sell it to someone for a higher price before this whole scheme likely comes crashing down. An awfully risky proposition in my opinion.

As Warren Buffett is famous for saying “When the tide goes out you will see who is swimming naked”. Those exposed right now are those who used debt to either live above their means, buy inflated assets or used a business model based upon debt and low interest rates. They are now finding out why debt is so dangerous. The interest and payments MUST be paid. Many are now finding out that when tenants don’t pay it is hard and often impossible to pay mortgages, commercial loans, etc.

This is just a microcosm of what is happening throughout society as society in general has been living above our means for decades. In 2008 the “markets” generated a margin call but with central banks “printing” hundreds of trillions of currency units the can was kicked all the way to September of 2019 when the problem of not enough income to pay expenses reared its ugly head again- only this time FAR larger than in 2008 because we doubled our debt(at least) since then to pretend that we could service the already too high to service debt.

Today, we have people who have bought homes on the beach for a million dollars. They may have an income of $100,000.00 or $200,000.00 and probably a primary residence and maybe a couple of cars. How do they afford it? They rent the beach home out and the renters pay the mortgage. If people stop coming and the rent stops coming in it won’t be long before the “plan” goes up in smoke.

Many Airbnb folks are learning the hard way that debts have to be paid or your well-laid plans may come to naught also. No renters. No income. Mortgage default not far off.

My point here is that debt is underpinning this entire paper economy that we are in and that it is in a precarious position right now- probably worse than it has ever been. In addition, this is a global phenomenon. Most countries, cities, states, provinces, companies and individuals are just a shock away from insolvency. Countries are already “printing” money to give the illusion that this is not true but the Fed alone has conjured up $1.8 Trillion just since January. (FRED) Other central banks are “printing and buying” also. Without this massive interference there is NO telling where these paper prices may be right now. As a matter of fact, the Fed is now bailing out cities and states in addition to companies and countries. In my opinion, these purchases of junk bonds, state and local bonds, etc. may be setting the stage for Fed ownership of all of these assets. It is not so far fetched to think that this could be happening as we speak because this is the way they work. Who owns the most real estate in the USA? Answer: The Fed. How did they come to own all of this real estate? They foreclosed on mortgages that they bought in the last crisis. What makes you think they will forgive a penny of what they believe they are owed this time? Good luck to all of those who are expecting some sort of debt jubilee. Nice thought and I would love to see it but the likelihood of that is slim and none.

Does anyone think negative interest rates make any sense at all? How about negative yielding JUNK bonds- yes there are some! Only an entity that could get these “assets” for virtually free would be willing to buy such things. CLUE- only those “printing” money for nothing and those who front-run their buys are involved here. Again, my hunch is that buying bonds in distressed companies make a whole lot of sense if you plan to let the company fail, wipe out shareholders, and the bondholders become owners of an unencumbered company which should perform well going forward because the crushing debts have been wiped out (at the common shareholders expense).

The world is drowning in debt. Many are counting on counterparties to pay their debts (which they may be able to or not) and are living dangerously close to the edge.

This is likely why central banks, major banks and billionaires are buying gold. It is nobody else’s debt. It is accepted as payment virtually everywhere in the world. Even though it is being artificially suppressed by banks selling paper contracts to keep the price down it has risen substantially and appears to be ready to move to new all-time highs in the near future. I also believe that silver just may outperform gold at least in the short-term.

With all of the tens of trillions in currency units being conjured up globally right now it is likely only a matter of time before the masses realize that their labor has been undermined by “printing” virtually worthless chits that a majority in our country are using to survive and buy things they could not afford without this “money from nowhere”. MANY are saying right now “I can make more staying home than going to work”. Of course, they produce NOTHING, the fake money produces NOTHING BUT they are still able to consume- for a while- until far too few things of value and necessity are produced and those producing demand REAL assets to pay for their labor.

At that point it will be game over for those unprepared because the paper and computer blips they were living on will have been exposed as worth a whole lot less than anticipated or even worthless. Because of the illusion of “something for nothing” the economy is being hollowed out even more than it would have been if people were back to producing goods or services- which will likely take far longer because of the handouts. Don’t be fooled by short-term stimulus. Get back to being productive ASAP.

Be Prepared!

Any opinions are those of Mike Savage and not necessarily of those of RJFS or Raymond James. Expressions of opinion 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. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

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