Weekly Article 09-28-2017
According to Janet Yellen the lack of inflation is a mystery to her. I guess it should be actually because how do central banks “print up” trillions of dollars, purchase virtually all financial assets (or prop them up or keep them down with policy) and asset prices stay subdued for years?
Could it be that the only thing QE actually did was put an artificial bid into stock, bond and real estate markets so that banks and trading houses wouldn’t get wiped out if there was true price discovery?
There are some strange actions taking place in many of these markets as we speak.
Whether there is good news, bad news or no news the stock averages are continuing to climb. This seems eerily similar to me as to what I saw in the late 90’s. There was no rhyme or reason for the daily advances or the valuations of companies but the indexes and individual names just kept climbing. Until they didn’t.
The main difference that I notice today is that computers are the main buyers while it appears that true animal spirits of individual investors was behind the irrational run-up the last time. It appeared that people bought into the “it’s a new era- a new paradigm this time”. Currently, it appears that computers are making most of the decisions which, in my opinion, will work similarly to what we saw from 1997-1999 until 2000 rolled around and many were left severely disappointed. Right now, most computers are buying. If, at some point, they all say “SELL” and since they are the lions share of the market- who will be there to buy and stop a rout? Possibly no one.
All of these games have led to traditional short players (those short stocks) abandoning the practice of shorting because you are basically fighting the central banks and have been hammered year after year. These folks have traditionally been a source of stability for the markets in downtrends because they buy a stock as the price is dropping to make their gains and it can put upward pressure on the stock price when it is needed most.
In the sovereign bond market all prices appear to be irrational. In Europe in many places you actually get to pay the issuer for the favor of allowing you to fund debts that appear to be unpayable without more QE. This has been discussed over and over but the “printing” and crushing of rates continues.
I believe a more immediate concern is that the US 10 year Treasury note- which a lot of debt is based upon has been gyrating in a manner that is not usual. This should actually be a fairly stable benchmark but recently it has been anything but. Just in the last few weeks this rate has moved from 2% to 2.31%. In the last 12 months it has moved from 1.53% on 9-28-16 to 2.64 during the year and 2.32 as I write this article. These are major moves in a market that determines the rates many pay for all sorts of loans. That 1.53 to 2.64% move is a 72% move in less than 12 months. That is tightening credit conditions. It hasn’t seemed to matter-yet. (Marketwatch)
Home prices keep on rising in many areas even though people’s ability to afford the homes is not keeping up. As I wrote last week the increases in median income reported are due to changes in the way the numbers are calculated and include all sorts of new payouts that are not actually earned income. It appears we are again looking at a situation where a problem appears to be inevitable. The only question is how imminent is the threat?
Gold and silver have had a pullback recently and for those who see the value of these assets may be setting up for a good entry point.
There is chatter all over about gold being revalued higher by either China, the USA or both.
I have written about the Chinese purchasing their imported oil with Yuan which would then be convertible into gold. It is said to be taking place prior to the end of 2017. If this happens it is a double-whammy for the gold price as gold would likely rise because of new demand and the dollar would fall because of a decreasing demand in international trade for US dollars.
Silver, I believe, will rally alongside gold and may post even larger moves.
It also appears to me that international currencies may perform well as the dollar appears to be in a prolonged downtrend regardless of recent strength.
Nothing makes any sense unless you step back and look at what the central bankers are doing- forget what they are saying. They have put $2 trillion in “money” from nowhere into financial markets in just 8 months in 2017. They’ll likely keep doing this – until they don’t or can’t!
You may be wondering why they couldn’t. If they keep it up they will have purchased almost everything. Many of these assets are assets that sustain humanity. Already you are seeing signs of discontent globally with individual circumstances. As Gerald Celente says “When people lose it all they lose it!”
Anyone who is in traditional asset models is, in my opinion, taking far more risk than they are aware of.
A little diversification just may go a long way!
Mike Savage, Financial Advisor
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