Ground Hog Day Turns Into A Decade

Strategies, Technical Analysis, U.S Investments

It’s been three months since I took a break to deal with some cancer issues. As I began to catch up, it was Déjà vu….

Déjà vu… “The strange feeling that in some way you have already experienced the present situation.”

Like “Ground Hog Day”, I’ve experienced the same warnings for the last decade.

John Mauldin recently warned, “And again, a recession is probably coming in the next year or two. The Treasury yield curve has been inverted for three months…it is flashing code red.”

Bill Bonner’s article, “What to do When Inflation Hits the Economy Soon“, hints it is very near:

“Most likely, the stock market will crash sometime before the 2020 election. We can’t know when.”

Bloomberg tells us, “Wall Street Rush to Safety Is Biggest Since Lehman Brothers Collapse“.

“…. In the seven-day period ending Oct. 9, investors continued to exit equity funds globally, with outflows reaching $9.8 billion…. By contrast, bond funds enjoyed $11.1 billion of inflows.”

Tony Daltorio, Editor of Premium Digest and Growth Stock Advisor recently wrote:

“U.S. corporate executives are selling stock in their own companies at the fastest pace in two decades….

…. Executives are on track to hit about $26 billion this year, which would mark the most active year since 2000.”

This Zerohedge article tells us the Fed is back to bailouts:

“Following Fed Chair Powell’s surprising announcement today that the Fed was resuming Permanent Open Market Operations after a 5-year hiatus….

…. Powell defined Quantitative Tightening as removing reserves from the system. Thus, by that simple definition, adding reserves to the system on a permanent basis via permanent open market operations, i.e., bond purchases, is Quantitative Easing. …the US is facing an avalanche of debt issuance and with China and Japan barely able to keep up, someone has to buy this debt. That someone: the Fed.” (Emphasis mine)

Which Déjà vu message should we believe? We have heard the sky is falling for over a decade. The last time the Fed bailed out the banking system, there were plenty of bad results, but the predicted market collapse and Carter type inflation have yet to appear.

Most readers have felt the “strange feeling” for some time, sensing things are just not right, yet, so far, nothing horrible has happened.

The Ground Hog Decade

In October 2008, congress bailed out the banks when they passed the “Troubled Asset Relief Program” (TARP). They created money out of thin air.

Pundits roared that Carter type inflation was just around the corner. I took heed. I believed them. I moved money into gold and sent money offshore to protect against the inevitable devaluing of the US dollar.

The TARP program was followed with several rounds of “Quantitative Easing”. When the dust cleared the Fed had pumped over $4 trillion into the banking system.

During that time, I joined Casey Research. We hosted investment conferences outlining how to protect yourself against the inevitable inflation. I wrote articles detailing how the market would crash, urging investors to keep their stop losses current and invest in foreign currencies and precious metals.

Well, it has not happened – yet! Sooner or later it will and the pundits will say, “I told you so”. I have not taken my hedging bets off the table, but damn – I’ve been waiting for over a decade hearing and sharing the same message. The government cannot continue to create money out of thin air without a collapse. All people will be hurt, not just the investor class.

Why no high inflation?

Inflation occurs when the world no longer wants to hold your currency. Other currencies are deemed to be safer investments.

A speaker at a Casey conference from Argentina told us how inflation wiped out the buying power of much of the country. Despite double-digit interest rates, no one wanted Argentine money.

As part of the bailout package, the Fed dropped interest rates, redirecting a lot of wealth from investors. I’ve seen estimates that over $4 trillion in interest that would have been paid to savers and pension funds was transferred to banks and the government in the form of interest savings.

What about parity? Why didn’t investors leave the dollar when interest rates dropped?

The chart explains it all. The blue line is the US ten-year treasury rate. At the turn of the century, rates were just under 7%. As of now, they are under 2%. The red line is the interest rates for Switzerland and the green line is for Japan. Note they now currently have negative interest rates.

By comparison, the USD has a higher yield and is still considered a safe currency. Remember the old saying, “The best-looking ugly chick at closing time.” US interest rates are “Coyote ugly“, but compared to the rest of the world they look pretty good.

Lessons learned along the way

I sent money offshore in early 2009 to hedge against potential dollar inflation. We assembled a balanced portfolio of stocks and safe fixed income products. We tolerated lower interest rates on the fixed income investments, assuming the appreciation of the respective currency would offset the difference. That worked for a very short time.

Using a foreign bank and money manager can result in fees of around 2% annually. Once the income from safe, fixed-income investments disappeared due to zero or negative interest rates, stocks were the next option.

US investors face the same thing with historic low interest rates. The stock market roared back and set new highs because investors had no place else to go. If you wanted income, you had to take more risks. Interest rates on junk bonds were lower than high-quality government bonds a few years earlier. The risk was not worth the reward.

What do we do now?

The Fed has started QE (without calling is so) again. Will it once again prevent an economic collapse? Interest rates are kept low because the governments are buying up the debt and not allowing the free market to set true interest rates.

How stupid can it get? Check out these recent headlines:

Zerohedge reports, “For The First Time Ever, Greece Issues Negative Yielding Debt“. Are you kidding me! Greece is the most indebted Eurozone nation and has been bankrupt twice. Would you lend them your money and pay them for using it?

How about corporate bonds? Zerohedge tells us, “A third of All European Investment Grade Bonds Have Negative Yields“.

GE could solve their pension fund dilemma pretty quickly if they could go to Europe and float $100 billion or so in negative interest rate bonds. They could take the money, adequately fund their pension plan, and get paid along the way. Just sayin’…

Want to take on a bit more risk for yield? Wolf Street reports, “Negative-Yielding Junk Bonds Have Arrived in Europe“:

“Every bubble rests on two pillars: a) it’s different this time; b) some other sucker will buy this worthless asset from me at a higher price, so I should hold on against my better judgment.” – Louis-Vincent Gave

“…. The total amount of bonds with negative yields has risen to nearly $13 trillion ….

…. In a negative-yield environment,…you’d be guaranteed a loss. You’d have to buy them solely on the hopes of even more deeply negative yields in the near future that would allow you to slough off these critters to the next guy before they eat you up.”

Jim Bianco states the obvious in this Bloomberg article, “Negative Interest Rates Threaten the Financial System“.

“Former Federal Reserve Chairman Alan Greenspan recently said he wouldn’t be surprised if yields on U.S. bonds turned negative and if they do, it wouldn’t be “that big a of a deal.”

Big Al is wrong! How much more destruction can pension funds and retirement savings plans handle?

Caution is advised

In the most recent edition of “The Swiss View” our friends at Weber Hartman Vrijhof & Partners (WHVP) sums things up well.

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

“Government bonds from developed countries in general offer negative interest rates…. Corporate bonds are still historically low…. Therefore, we are observing the fixed income markets….

…. If there will be another correction, which in our view is quite likely to happen within the next 6 months, there will not be many exceptions.

Since it is impossible to forecast the exact timing of a correction, we stay invested in shares but have quite high requirements…. The volatility of shares we hold must be low and balance sheets must be stable. …. A low debt to equity ratio is appreciated. We set stop losses at levels where they will not be triggered in the case of a correction but will make the risk measurable should we end up in a full-blown bear market.”

You can still get 2% if you want a 3-year CD. What if the Fed’s revised QE pulls the rabbit out of the hat and the market soars like last time?

If you want to remain in stocks, as our WHVP friends said, you better know what the heck you are doing and have a plan to exit quickly if the crash happens.

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The majority of the public was opposed to the bank bailouts. Had the government not interfered with the free market, it would have all been behind us by now. Sad!

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