Weekly Article 02-01-2018
Well that was quick! It seems like the ball just dropped and here we are going into February already!
It was quite an impressive month for stock averages even though they have pulled back in the last couple of days.
Many people are concerned that this market has gone past any sense of sanity and is now in a precarious position. They may be right- or they may not. Many know that I have been of the belief that the stock averages could have collapsed since 2013 when the bond markets were unstable to say the least. I have also said that I believe when the market does have its day of reckoning it would likely start with rising rates and lower bond prices.
Since the ultra-low rates are propping up the bond, stock, and real estate markets I am pretty sure that there is a rate at which all of these markets could react violently. The most commonly asked question I get is “when?”. My answer is that if I could tell you that we could all be billionaires. Too bad I have to make as good a guess as I can.
The reason that it may not be an imminent event is that central banks are intervening (propping up or keeping down) prices in virtually all markets. As I wrote comments like this years ago people thought I was delusional because most of the “interventions” were hidden well. Like the $700 billion bank bailout that the Government Accountability Office said cost over $16 trillion at the time and I have heard has ballooned to over $24 trillion today.
These days there is no hiding the fact that central banks are buying virtually all assets with “money” that is not even printed- it is just keystroked into existence.
There really is no way to say when these interventions will fail- all I know is that there is NEVER something for nothing even if it seems to be so for a while. There is always a price to pay. At this point they are paying interest due on existing bonds with money from nowhere, buying new government debt with money from nowhere, buying corporate bonds with money from nowhere, buying stocks with money from nowhere. Allowing firms to have paper contracts to suppress the price of assets they want to be lower and this is all being done right in front of us.
So why worry? This could go on for a long time right? I guess it could but there are a few reasons that it may pay to pay attention to a few things happening right now.
Interventions in the metals markets are not failing but the prices are not being hammered like they were a couple of years ago and it appears that the physical market may overtake the paper market in the near future. The large paper sales are having less and less of an effect. You can tell this by looking at the charts, seeing when they dump massive paper contracts at the most likely times to try and lower the price, and even if it has an effect the prices have been rallying back very quickly.
Of course, since central banks, particularly in Asia and emerging markets are loading up on physical gold it appears that there are willing buyers to “buy the dip”.
While stock markets are rising it leads to all sorts of irrationality. Those that feel like they are missing out usually jump in at the wrong time. Right now, individual investors have the largest margin debt of all time (borrowing to get more exposure to stocks), have the least cash in their brokerage accounts – EVER and are all-in.
I had a visit from Eagle Funds during the week where they said that there was more cash on the sidelines than in a long time. I said that is not what I am hearing and talked about what I just wrote up top. Their answer was that “the institutions are reducing exposure to the stock markets drastically”. Their idea is that this money will look to reenter the market at some point. My idea is that the “smart” money smells a rat and is looking to avoid a major pullback.
The only answer to the question – is it imminent?- is it could be. I do, however, have to add that if the central banks keep propping up particularly the bond markets- where interventions are off the charts right now- it is possible that it continues to prop up stocks for a while longer and could lead to a far weaker US dollar. The weaker US dollar, in my opinion, could lead stocks higher than we think possible. I also have to add that in that type of scenario I would expect commodities, commodity stocks and precious metals to outperform all other markets because you will need more dollars, yuan, yean, euros, etc. to buy real assets.
Never forget- the central banks can “print” unlimited “money”. However, there is a finite amount of resources on the planet and the more “money” they conjure up from nowhere will likely lead to shortages of actual materials and higher prices for all goods. While this may not play out immediately it will likely play out over time because of the price distortions caused by the interventions in most markets. Mining becomes unprofitable if prices are artificially low just like drilling for oil or gas gets curtailed if prices are too low.
The central banks can’t even keep their hands off of the VIX index as they are shorting the VIX- that means they are driving the fear gauge lower. Since machines are doing most of the buying and selling in these markets they have no emotions- if fear is low they buy. Quite an easy way to manipulate the robo-traders and have them do their trading for you! My good friend Bob Unger put it best- “It’s like having a crowded venue and turning off the smoke alarms”.
My guess is that when the “smart money” looks to reenter investments they will be looking for undervalued assets. That could be stocks at far lower valuations, bonds at far lower valuations, real estate at far lower valuations or metals and commodities which have already suffered their major pullbacks already. Keep in mind that the metals markets are small and if institutional money gets interested it could lead to outsized gains very quickly. The only question- and it is a good one- is WHEN?
Mike Savage, ChFC, Financial Advisor
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