Weekly Article 10-18-2017
Many people have told me that central banks, because they can “print” money, have an unlimited capacity to keep asset prices moving upward indefinitely. I have to disagree. While the central banks certainly appear to have unlimited “resources” (I highlight resources because their “product” is debt that encumbers us that is “printed up” out of thin air) since each action is required to be larger than the last to get the same results eventually they will run into trouble.
Keep in mind that this “money” that appears out of a mouse click produces NOTHING. It creates an illusion of solvency where many times it does not exist. While central banks may “print” hundreds of trillions of dollars, euros, yen, etc. there will likely come a time when all of the “printing” has little to no effect.
Already in the European Union the European Central bank is stating that they are running out of assets to buy. They may have to reduce their 60 billion euro a month spending spree if they don’t start buying other assets. Japan is already making no bones about buying up Japanese ETF’s, Japanese and global stocks and are already purchasing all of the Japanese Sovereign bonds issued in the past few years.
What if … central banks have an unlimited ability to create currencies and debt but have a limited ability to have it be effective? What if all of the debt that has been piled on is not able to be supported by economic activity? Actually we are already not able to service existing debt- that is the main reason for QE. When will it be obvious should be the question.
My answer is when US states start to default on payments, large banks start to have problems with bad loans because regular people can’t afford their homes, autos, etc.
If anyone is under the illusion that we don’t have a problem RIGHT NOW then you are falling for “the market’s going up so all is ok” propaganda.
In an article from Larry Elliott in the Guardian on Oct. 10th.:
Regarding the IMF (International Monetary Fund) “The warning has gone out loud, clear and early: be careful, because the long-awaited upswing in the global economy may not be for real. The fund’s concern is that wage growth and inflation have remained weak, despite a prolonged period of ultra-low interest rates and the use of quantitative easing (QE) the money-creation process used by central banks in an attempt to stimulate activity. Asset prices have risen sharply as a result of this stimulus. But the IMF fears amid the euphoria, financial markets are ignoring the risks, just as they did during the buildup to the crisis in 2007. What’s more, central banks and finance ministries have used up much of their ammunition in the past decade. There is little or no scope to cut interest rates, QE has long been subject to the law of diminishing returns, and governments are running much bigger deficits”
I believe what they are saying is that the “recovery” never happened and that the “printing” can be credited for keeping the illusion alive but that it likely has an expiration date.
Another major reason for immediate concern is that the IMF has also issued a major warning about many major banks in Europe. Some of Europe’s largest banks are saddled with massive non-performing loans. That means people and companies are not making payments.
It only makes sense that if people and corporations are deeply in debt and their incomes are not rising along with the cost of “assets” then without the help of personal QE they have to decide what gets paid and what doesn’t. I guess food, water and shelter come before all else- in many cases the shelter payments are not being made either.
All of this “QE” has done nothing but distort all supply and demand and has made many primary necessities that people need to live (food, shelter, etc.) out of reach of the lower levels of society and has reduced the middle class to a struggling class. It’s not much of a surprise that there is so much turmoil in the world today.
I have believed that as long as the central banks worked together that this could go on longer than anyone could anticipate. Now I am not so sure anymore. The main reason is that as all of this “printing” is taking place more and more assets are being propped up and owned by larger and larger entities like sovereign wealth funds, central banks, major banks and hedge funds.
While most asset purchases many years ago were reported to be mostly bonds today these entities are purchasing large stakes in some of the biggest companies on the planet. The largest shareholder of Apple is the Swiss Central bank.
Once these entities get a stake large enough will they attempt to control the companies? Will they take over the boards? If so, what do these people know about running these companies? Let’s not forget they “bought” these assets by “printing” the money to buy them. It doesn’t appear to me it takes too much skill to build a portfolio if you get it virtually for free.
If history is a guide expect “Uncle Al” to be running a major corporation even though he may be an unemployed barista. Good luck for that company. This type of nepotism is what has collapsed Venezuela, Mexico’s oil production and many other entities in the past.
My belief is that the biggest threat to all of our portfolios right now would be a default of a major bank that could lead to contagion. This means that if a large enough bank went down it could bring many others down with it.
Many may ask “Why would they let that happen? They’ll just “print” the money and bail them out”. Maybe. However, I would have to ask why tens of thousands of hours have been put into planning how to do bail-ins globally. At IRS.gov there are meeting minutes from April 14, 2016. In it they say that all banks have to have their bail-in plans approved by January 1, 2017. HMM.
Expect the unexpected.
What has QE gotten us so far? Higher asset prices that raises the cost of living for everyone. More debt that is getting harder and harder to service day by day. It has made a few fabulously wealthy and has impoverished the majority. It has made it virtually impossible for pension managers to meet their investment objectives because of low rates leading to pension funding problems. It has led to those that have vs. those that don’t.
Anyone who is keeping their fingers crossed and hoping that this doesn’t end is, in my opinion, in for a rude awakening. A little planning may help. Some exposure to assets that may be expected to rise when others fall may be what allows you to get through what appears to be coming our way.
If you are not sure about what assets may provide a negative correlation to traditional assets like stocks, bonds and real estate it may pay to have a chat!
Mike Savage, Financial Advisor
Securities are offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc.
Any opinions are those of Mike Savage and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information contained 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 considered 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.
Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. There may be sharp price fluctuation even during periods when prices are overall rising. Precious metals, including gold are subject to special risks, including but not limited to: price may be subject to wide fluctuation, the market is relatively limited, the sources are concentrated in countries that have the potential for instability, and the market is unregulated.
Diversification does not ensure gains nor protect against losses.