Weekly Article 10-05-2017
As I am writing this late on Wednesday the major US stock averages remain moving higher as bond yields are moving higher and bond prices are moving lower. It appears to me that many may be buying the Fed’s statement that they are going to start to normalize their abnormally large balance sheet.
This would likely mean selling off assets that have been purchased in the last 8 years or so. I am very interested to see who might actually buy many of these “assets”.
I am not personally buying it because it is my opinion that all that is keeping rates low, bond prices high and stock markets at dizzying heights is the direct intervention in these markets by the central banks, sovereign wealth funds, hedge funds and large global banks.
I fail to see how rising interest rates can be a positive for stocks. Obviously rising rates are bearish for bonds but stocks are also directly affected by higher rates as it acts as policy tightening and slows down economic activity as the price of money increases.
Remember only central banks can “print” money with the click of a mouse and buy assets. Those hedge funds and large global banks still need to borrow money to make their trades. Higher rates would likely lead to less activity. The sovereign wealth funds could actually become a drag on this plan prior to higher rates as many of these funds that have been purchasing assets may have to start selling assets rather than buying to make up for the shortfall in their budgets whether it be because of outsized social promises or low prices for oil, etc. that they may be counting on for income.
It appears to me that if rates continue to rise it will likely have a negative effect on stocks, bonds and real estate. This is one of the major reasons I have said many times that the central banks may allow stocks to correct and real estate may correct but the bonds, in my opinion, are the last assets that they can let go because it can have such an impact on all other asset classes.
Many may also say that rising rates would be bearish for precious metals also. In the short run they may be right but I don’t think that would last for long.
Rising rates, particularly meaningfully rising rates that would take us back to “normal”- maybe 5-6% on the 10 year treasury note- would likely be enough to crush most asset values because of the sheer volume of debt that is out there. This debt is crushing not just here in the USA but globally. This scenario would likely lead to defaults, bankruptcies, etc. and lead to an overall distrust of the current fiat system that has been in place for as long as we can all remember. If rates really get out of hand – like when I got my first mortgage for 16.75% in 1982 then things could really get ugly.
At this point investors and indeed all people will likely be looking for assets that have tangible value such as food, water, farmland, timber, energy and of course, precious metals, particularly gold and silver.
I’m not sure what type of economic activity would be taking place if money wasn’t virtually free anymore but I am sure that everyone needs to eat, drink and have assets to purchase or barter for those things that are necessary for everyone.
My opinion has not changed. If the central banks continue on the path they are on (2 Trillion in asset purchases in the first 8 months of 2017) and likely rising- expect inflation and a rising gold price as investors realize there is no way out except to exponentially increase the amount of “printing” and asset purchases to keep the system afloat. In this scenario I believe silver may outperform gold as economic activity would also be being propped up.
If, however, central banks actually pull back and allow rates to rise and asset prices to normalize it could quickly turn into a rout which could lead to that lack of confidence in the system and lead to a rising price more so for gold because it is more of a monetary metal and economic activity would likely be decreasing leading to less demand for silver. I still believe the price would rise as silver could be a place people may look to store value rather than fiat currencies.
Anyone who is counting on cryptocurrencies- good luck. I don’t believe the central banks will give up control of “money” and governments will not take kindly to trade that is not taxable. In addition to that if the power goes out or the internet is down you have no access to those “assets”. I hesitate to call a cryptocurrency an asset as it is nothing but a computer blip with nothing backing it up. I always see bitcoin portrayed as an actual coin that appears to be gold- it is nothing but a computer entry. Could be here today and gone tomorrow. Particularly if, as is my opinion, central banks will issue their own cryptocurrencies and use of others will be greatly opposed- most likely with threats of massive taxation, jail time, etc. I wouldn’t be surprised to see current cryptocurrencies experience a tragic accident at some point that the central banks would ride to the rescue to “fix”.
We are truly in uncharted waters here. Many people appear to be asleep at the switch thinking that the Fed has their backs. I don’t buy that either. If that were the case then we wouldn’t have any recollection of the booms and busts that have taken place in the last 20 years or so.
I believe there will be another soon. It appears to me to be inevitable. The question many would like to know is- is it imminent. Regardless of WHEN I believe that being prepared years early is better than being prepared a minute late.
Mike Savage, Financial Advisor
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