The Fed is meeting as I write this and the anticipation is that they will reduce rates between .25 and .5%. Our President is pushing for a 1% rate decrease in the “greatest economy of all time”.
My take is that the Fed realizes that without a lot more “free money” and asset purchases the stock and bond markets would likely be in a lot of trouble going forward. It appears to me that the limits have again been reached for any private help for the economy as anyone who can afford to carry debt is already loaded down with plenty of it.
There could still be a short-term boost because of lower rates and the fact that the Federal debt limit has basically been eliminated until after the 2020 elections- heaven help us!
It is extremely obvious that with over $13.5 trillion in negative-yielding debt globally that the central banks are already buying massive amounts of assets to create such anomalies that have not existed in over 5000 years of economic history. It is also apparent that many central banks and sovereign wealth funds are providing demand (by “printing up” money from nowhere and buying stocks also) where a whole lot less would actually exist without the fake money. The low to negative interest rates have also allowed companies to issue debt and buy back their own shares- also leading to earnings that are perceived to be better because of fewer outstanding shares and higher prices for the stocks being repurchased. Of course, the shareholders like the short-term boost to the stock price. I wonder how they will feel if the said companies go bust in the future because of the excessive debt loads that many (if not most) are carrying because of this scheme. My opinion is we are not too far from finding that out with some companies that are not strong financially.
With the Fed supposedly lowering rates for the first time in 10 years I thought it would be a good idea to see what would have happened if you had bought the S&P 500 after the Fed’s first rate cut in 2007. (In my opinion they saw the weakness then just as they do now and were trying to stay ahead of it).
According to Howard Marks (Oaktree Capital Management co-founder) “Basically, if investors had decided to pile into the market after the first rate cut of 2007, they would have lost half of their money”.
Also keep in mind that the Fed dug in and started unprecedented levels of interference into the markets at that point so there is nobody out there who can really say where the actual “bottom” may have been if the markets were allowed to be markets and determine fair value. After over a $100 trillion in interventions (and possibly MUCH more) the markets have become a managed mess and will likely continue to climb- until they don’t. On that day it is likely that if you are not out you will wish you were.
There was an article by Money and Markets that featured Mr. Marks and in it there was a list of beliefs that have become prevalent in this latest market run-up. I am going to post the list and my reaction to each point. I will also give Mr. Marks’ take : “The nine propositions reviewed above represent variations on “things can only get better forever” Marks wrote “If they’re the ideas guiding investors today, that should be considered worrisome”.
- There doesn’t have to be a recession. My take: Yes, there does need to be a recession from time to time. It is the cleansing of the system that allows the old and behind the times to die and new dynamic industries to spring up in their place to provide future growth and jobs. Not allowing- or postponing recessions just allows zombie companies to exist for a short period longer. It also allows others who have had recessions (many other parts of the world) to not only catch up but possibly overtake those who have become complacent- like we seem to have done.
- Continuous QE (money “printing”) can lead to permanent prosperity. My take: If this were true then Zimbabwe and Venezuela would be the richest countries the world has ever known. On the contrary there are hundreds of examples of the excess “printing” being the ruination of many nations and not ONE Example of success in recorded history. I also decided to look up what has happened with the Nikkei 225 index in Japan since they are the leaders of the “money printing” pack and have a balance sheet of over 574 TRILLION Yen. This should provide some idea of how successful this “printing” has actually been. Keep in mind that in 1989 the Nikkei index was near 40,000. Today it is at 21,709 (close 7/30/2019). That is 45% lower than 1989. 30 YEARS LATER and with MASSIVE buying by the Bank of Japan. The sad part is that in the past 4 years they have been buying with reckless abandon and the Nikkei closed on 5/27/2015 at 20,473. So in the past 4 years or so with trillions of yen thrown at the stock and bond markets the Nikkei has managed a return of 6% in 4 years. That is a return of 1.5% annual. It appears to me that the “printing” is just preventing a collapse- particularly when you see the charts that show the Bank of Japan buys when the Nikkei is down. Good luck with the “printing” being a long-term answer.
- Federal deficits can grow substantially larger without being problematic. My take: We may find out soon that this is likely not true. Just a small increase in interest rates could throw our “budget” deficit even further into the red than it currently is. Look out if foreigners stop funding our deficit spending. The lifestyle we have become accustomed to would likely end quite quickly.
- National Debt isn’t worrisome. My take: I guess as long as the Fed can “print” money and pretend that we can just go ever deeper into debt this can be true. However, we have obviously gone past any realistic point where we could repay the existing debt with our currency anywhere near its current value. It worries me a lot. We have put future generations at great risk because of this foolish belief.
- We can have economic strength without inflation. My take: This I agree with. People my age and younger can only remember inflation. Those who study history would know that deflation was the rule of the day when we had sound money. A basket of goods in 1800 that cost $200.00 was approximately $100.00 in 1900 because of the advances in farming and transportation. If we had sound money and the technological advances of today we could all be living like kings- unfortunately we have the tech but our money has been being debased unmercifully since 1971. If we had a real currency and not a debt-based note things would likely be a LOT different.
- Interest rates can remain lower for longer. My take: Of course they can- just look now. Who could have imagined the games being played to keep rates where they are. Of course, in Europe where negative interest rates are prevalent the banks are being destroyed, pensions are having to take far more risk than is likely prudent to hit investment returns and insurance companies are likely having to take more risk also to achieve the returns they need to to offset claim exposure. They can stay artificially low but at what cost? Likely the destruction of the economy that we all rely on to produce goods and pay a return on our excess capital.
- The yield curve needn’t have negative implications. My take: Banks invest short and lend long. If there is no “spread” there is no profit to be made and lending grinds to a halt. The yield curve flattening and then inverting has accurately predicted each of the last 4 recessions in 1981, 1991, 2001 and 2008. (Thebalance.com) Keep in mind that this inverted yield curve assumes the Fed will have to lower rates- which they are rumored to be starting on 7-31-19.
- Companies and stocks can thrive even in the absence of profits. My take: This is delusional. As a matter of fact just last week Joseph Carson, former director of global research at Alliance Bernstein put out a piece that shows that there has been NO profit growth in US companies in the last 5 years! You may say – yeah but stocks are up. That is because of accounting gimmicks and stock buybacks along with central bank buying. Without profits companies are doomed to collapse under the weight of debts added in the past 10 years in particular. Just like the dot.com bubble. No profits= no company real soon.
- Growth Investing can continue to outperform value investing in perpetuity. My take: Every dog has its day. In my opinion you make the best calls you can make at the time and if the situation changes it is best to change your mind. Then change your allocation!
The point that I am making here is that many people are blinded because the market has risen for 10 years. That, in itself, should be a cause for extra caution. It is unnatural.
I will also add that many, particularly here in the USA, consider gold and silver barbaric relics. That is because the central banks and major banks, along with their buddies on the financial game shows have conditioned many to believe that- as they buy up record amounts under the radar. Watch what they do- not what they say! If your advisor is not at least discussing some options for diversifying your assets out of just traditional stock, bond and cash portfolios feel free to call me to discuss your options.