A question that I have to ask is one that everyone should at least consider at this time. It is exceedingly important to have an answer as a 40-year bull market in bonds appears to be coming to its end. Virtually all prices are derived from bonds (cost of money) in our debt-based system.
Many people have used the cheap money to buy assets with credit or margin whether it be stocks, real estate or using leverage to get better yields on bonds. Many companies have also used cheap credit to go deeper into debt to buy back their own stock and pay dividends that couldn’t be paid out of earnings as they are supposed to be.
Individuals are careening into debt faster than ever as the cost of basic necessities are skyrocketing at the fastest pace I have ever seen- and I was around in the 70s and early 80s.
Remember- the only entity that can conjure up cash out of nowhere to feign solvency is the central bank. Cities, states, individuals, and corporations rely on earnings and savings to pay salaries and carry debt. It is too bad that many are going even deeper into debt to fund what earnings and savings once did.
While I believe many are seeing that things are changing- and mostly not for the better- a question that I believe most are ignoring is this:
WHAT HAPPENS WHEN ASSET PRICES FALL OR COLLAPSE AND THE DEBT AND DEBT SERVICE REMAINS?
Do you have a plan that can get you through a time when income collapses but your debtors still demand payment? If you have no plan, you may lose the asset. An asset is only an asset if it is owned unencumbered (you don’t owe someone else via loan).
In the case of corporations, the answer is simple. That $200.00 stock that made you a paper fortune would become worthless – as in ZERO -when the company defaults on its debt. Many companies are so far underwater that all but secured bondholders would be wiped out. Of course, their debt would be worthless also until a debt-for-equity swap would make them owners of an unencumbered company.
Many historically successful companies are in this boat and may be taken over because of their inability to carry their massive debts. The fact that supply chains are broken, commodities- particularly oil are surging in price likely means that inflation is becoming even a larger problem rather than smaller and doesn’t look close to ending anytime soon.
There have been many instances where municipal, state, and sovereign debt has defaulted. In these instances, the bondholders usually get paid cents on the dollar. Of course, in this country we have never been in such a precarious position as we are in right now with debts and deficits in uncharted territory and climbing relentlessly. Even if you were to get paid something in the future what would it buy you? Probably not what you expected when you invested.
While many may think I am a doom and gloomer, I am just a realist. While the financial game shows and the mainstream mockingbird media tout how “GREAT” our economy is- I look at the numbers like:
- Unemployment is 3.6% (Only if you don’t count the 100 MILLION + discouraged workers) Try 25% +
- Inflation is 8.6% (Bad enough but easily DOUBLE that without the adjustments since the 80s)
- Everybody is RICH! (Do you feel “richer”? Real wages FELL 5.5% in Q1 2022 (BLS)
- Business output DECLINED 2.3% Q1 2022 (Productivity crashed by most since 1947)
- Labor Costs surged 11.6% in Q1 2022 (Bloomberg)
- 21 Factories (Fertilizer and food processors) have either blown up or burnt down since January in the USA.
- CF Industries has let it be known that Union Pacific will no longer deliver their fertilizer – just when our farmers need it most. Is it me or does it appear that someone or some entity wants us to starve?
- Many (IMF, World Bank, Joe Biden, etc.) are all warning of a global famine. It appears to me to be a planned event.
- While our president released oil from our strategic reserve, we are sending most of it to Europe. This should lead to FAR higher prices- especially since he is now replenishing the reserve.
- I drove by a BP station on Route 611 in Tannersville, Pa. where a gallon of diesel was $6.39. What will that do to transportation costs and delivery of foods and all items?
While wages may be rising, they are nowhere near keeping up with the inflation that is hitting us. Costs are rising relentlessly for all businesses, but the smaller companies are most at risk because they don’t have the same purchasing power, deep pockets or ability to pay more in wages like larger corporations can do.
Personally, I believe that there are very few good options to keep your portfolio moving forward meaningfully right now. All I can do is do what the banks, central banks and countries are doing- buy hard assets- particularly gold as it is one of two assets that can be listed as “riskless” on central bank balance sheets. In particular, it is nobody else’s promise to repay.
Remember what Warren Buffett has said “When the tide goes out you find out who has been swimming naked”. I believe MANY in this “market” make it the largest nude beach in the world.
What is the VALUE of a PROMISE that cannot, or will not, be kept?
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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