- Golden oddities from Europe and China
- The $14 trillion debt tsunami: Moving closer, thanks to the China devaluation
- Trouble for energy and materials stocks as China “exports deflation”
- 80 years of Social Security… solar power for resilience… a frank question about the IMPACT system… and more!
Found: One half-kilogram gold bar. Lake Koenigssee, Bavaria. Contact Rosenheim, Germany, police if yours.
That’s the gist of the most curious item to cross our desk this week. A half-kilogram is 17.6 troy ounces. At this morning’s bid of $1,119, that’s nearly $19,700.
A 16-year-old girl on vacation with her family found the bar six or seven feet beneath the surface of the lake and turned it into police. Casual inspection reveals something — a number? — has been scraped off the face of the bar.
Hmmm… Probably a little less than a half-kilogram now
[Photo by Rosenheim, Germany police]
A search has turned up no other treasure in the lake. Police have been quick to deny any Nazi-era connections. But legend has it retreating Nazi troops hid 730 gold bars near Lake Walchensee as Allied victory approached in April 1945.
And that’s not far from where this bar turned up. Hmmm…
Another golden oddity: China’s central bank is now providing monthly updates of its gold stash.
As you might recall, China revealed the size of its gold reserve last month for the first time since April 2009. It had grown 57%, to 1,658 metric tons.
Lost in the resulting hubbub was the fact the Chinese have begun stating their reserves under the “Special Data Dissemination Standard” set by the International Monetary Fund. “Countries using that standard report their gold holdings monthly,” says the Financial Times.
This month’s new total — 1,677 metric tons, a 1% increase. Assuming they’re telling the truth.
Thanks to China’s devaluation this week, a $14 trillion debt tsunami looms closer to shore.
It was seven months ago today in The 5 that Jim Rickards first alerted us to “a $14 trillion pile of corporate debt that cannot possibly be repaid or rolled over under current economic conditions.”
That’s $5 trillion of junk bonds issued for energy exploration… plus $9 trillion more issued by companies in emerging markets, all of it denominated in dollars.
This week, the average price of dollar-denominated junk bonds tumbled to its lowest level since 2011 — 95.8 cents on the dollar. That compares with 101.3 cents in February.
From a Bloomberg account: “Debt of some energy companies, including Energy XXI Gulf Coast Inc. and SandRidge Energy Inc., fell more than 5% on Tuesday alone, Bank of America Merrill Lynch index data show. And China’s move deepened losses on obligations issued by U.S. metals and mining companies, which are already suffering their highest default rate since 2003.”
Essentially, if the devaluation is proof that China’s economy is slowing down, it’s bad news for commodity producers. More about that shortly…
“The high-yield bond market is having a coronary,” David Rosenberg tells CNBC.
Rosenberg was Merrill Lynch’s chief economist for years. More recently, he’s held forth at the boutique firm Gluskin Sheff. He’s one of the few mainstream economists worth listening to.
He points out the average yield on a junk bond has risen 1.2 percentage points in the last two months alone.
Result: Investors have pulled $3.43 billion out of the two biggest junk-bond ETFs since June 1.
We told you in mid-June how signs of stress were showing up in those ETFs. Hedge fund manager Erik Townsend was short selling 12,000 shares of HYG, the biggest junk-bond ETF — until his broker closed the position against his wishes. There weren’t enough shares available to borrow.
“If they can’t manage to find a single account with an open long in HYG (to borrow to back my short),” he told us, “what else does that imply about liquidity in the junk bond market?”
“The next financial collapse will come from junk bonds, especially energy-related and emerging-market corporate debt,” said Jim Rickards here last January.
Again, the total is $14 trillion. “If default rates are only 10% — a conservative assumption — this corporate debt fiasco will be six times larger than the subprime losses in 2007.”
Here’s a chart of HYG going back to Jim’s warning on Jan. 14.
The stress can only continue to build. The $5 trillion in debt issued for energy exploration is further threatened this morning by oil at $42.33 — the lowest level since the darkest days of the 2008 financial crisis. And the $9 trillion in emerging-market debt denominated in dollars further is threatened by the dollar sitting at multiyear highs relative to other major currencies.
And into this volatile mix China devalues this week, firing a new shot in the currency wars? “China just darkened the future for riskier corporate credit around the world,” says the aforementioned Bloomberg story. Nice understatement.
Early next week, readers of Jim Rickards’ Currency Wars Alert will get a new trade recommendation that follows from the China devaluation. His research team anticipates a double, triple or more from this trade alone. We urge you to check out Jim’s urgent message about this week’s big news if you haven’t already. It’s addressed exclusively to Agora Financial readers like you. The video will take only two minutes to watch. Click here for immediate access.
The major U.S. stock indexes are wheezing their way to an underwhelming close this week.
As we write, none of the indexes has moved more than a quarter percent. The S&P 500 sits at 2,086. Treasury yields continue to back up, the 10-year at 2.2%.
Traders are chewing on a mixed bag of economic numbers…
- Producer prices: Up 0.2% last month, says the Labor Department. Year over year, the figure registers a decrease of 0.8%. No sign of inflation, as far as the Federal Reserve is concerned
- Industrial production: Up 0.6% in July, says the Fed. But the internals are weak: Mining rose 0.2%, utilities fell 1% (thanks to a cool summer) and manufacturing rose only 0.1% once you factor out auto production.
“China is now exporting deflation,” pithily remarks Byron King of our natural resources team. “China is obviously fighting for export markets, while de-linking its currency from past ties to the strengthening dollar.”
Result? “We’re three years into a mining recession based on falling commodity prices. We’re a year into an energy recession based on falling oil prices. And China’s actions have the potential to pull the rug out even more from under commodities and energy.
“Last week in Singapore, I had a long talk with a wealthy Chinese investor. He made his money in China over the past 25 years; now he’s moving funds out. He explained to me, ‘I expect deflation in China, as well as in other economies across the world — Japan, rest of Asia, U.S., Europe. I’m selling down to a ‘core’ set of positions and building up cash, as dry gunpowder, for the time being.’
“Then he added, with a smile, ‘As you know, we Chinese invented gunpowder.’”
What did that man know about China’s pending devaluation?
Yesterday, Byron urged his readers to part ways with several energy and materials names in the Outstanding Investments portfolio — the better to keep dry powder and a leaner portfolio of high-conviction names.
Social Security turns 80 today… but how many Americans want to celebrate?
Every few years, Gallup surveys people who haven’t retired yet, asking this question: “Do you think the Social Security system will be able to pay you a benefit when you retire?”
The current number is down substantially from the last time the question was asked, in 2010… but still, nearly half don’t expect to collect a thing.
“We have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age,” said President Franklin Roosevelt when he signed the Social Security Act into law on Aug. 14, 1935.
Not so much, say the survey respondents. Broken down by age, two-thirds of baby boomers — defined here as ages 50-64 — expect to collect something. That drops to only one-third of Gen Xers and millennials.
As we’ve mentioned here periodically, Social Security’s actuaries expect the “trust fund” to be depleted by 2034… but our friend David Stockman, the former White House budget director, says it’s more like 2026.
No wonder our income specialist Zach Scheidt is keen to have his readers “piggyback” the Canada Pension Plan — run by professional managers, running a surplus and growing its reserves.
If you haven’t considered it yet, you should check out this interview with a retiree who collected $4,891 last year using the piggyback method. All you need is a regular brokerage account to get started — details here.
“Solar electric is not for everyone or every situation,” writes a reader who wishes to weigh in on an ongoing topic.
“I had training in the technology and installation. I installed two photovoltaic panels rated at 520 watts total and a battery bank plus other components to run a small refrigerator and my well pump.
“Yes, I like the 30% federal tax credit and 25% state tax credit, but I got it for insurance. If my power goes out, I am out of water and cold food storage. My area is known to have hurricanes and ice storms, which can take out the power for a week or more. We also have terrorists attacking the grid and solar flares to worry about.
“A generator would run until I ran out of fuel. If I could get it started. Running a water line to supply my house would cost the same as the total solar system, but no tax credit and a bill every month. Solar makes sense to me in my situation and gives me peace of mind should disaster strike, which I value greatly.”
The 5: No doubt.
Maybe it goes without saying, but… the question of whether solar is right for your home is a separate question from whether it’s a viable investment vehicle. Different people will have different answers to the first question.
But on the second question, the jury has come back — and the verdict is profitable.
“I find Jim Rickards’commentary intelligent, enlightening and helpful in terms that make sense,” a reader writes.
[As usual, we’ve been at this long enough to anticipate the inevitable “but”…]
“But the ad teaser for the IMPACT system is really the opposite of that, probably because whoever wrote it is used to that particular sales ad writing style.
“There was a time when I would’ve taken the bait from reading that ad. But my reasoning mind tells me there’s just not enough info about what this investment service really is — and the info about what the service is NOT doesn’t help my interest either.
“If I went to a financial department store and the salesman was trying to sell me a big box called IMPACT, it wouldn’t be helpful for him to tell me what wasn’t in it — and it wouldn’t be helpful to say what might be in it. Kind of reminds me of the political pitch we have to pass this legislation to find out what’s in it. Really? All I can really tell from the ad is that he’s selling something related to increased volatility (VIX). Maybe it’s an advisory service on when to buy call options on the VXX, for example.
“Whatever it is, I can’t see any reason for the ad copy not to come out and say it more plainly. Good grief! What are you afraid of? If it’s really that great of an advisory service, why be so mysterious? That suggests to me that the asking price is higher than it really needs to be.”
The 5: Comparing our promotional copy to Nancy Pelosi’s infamous statement about Obamacare? That’s surely a 5 first!
Anyway, a direct question deserves a direct answer: No, it has nothing to do with the VIX. Like forex trading, that’s for pros only.
“Since currencies are intertwined with virtually every aspect of the global economy,” Jim explains, “these moves end up creating ripple effects on the stock market and the options market… which in turn can set up very profitable trades in both of these markets.
“That said… our extensive back-testing shows the MOST profitable trades occur in the options markets. Each alert you’ll receive in Currency Wars Alert will tell you exactly what specific investments you’ll want to use in each particular situation.
“But remember, IMPACT isn’t options trading like you’ve ever seen before. There is no writing of options, as you’d need to do with strategies based on covered calls or selling naked puts.
IMPACT isn’t a complicated ‘advanced’ options trading strategy. Instead, it is a predictive system and hedging strategy designed to be simple yet elegant.
“IMPACT is also a new mindset. The same mindset that I use… one that can let you unlock profits from currency markets… from multiple currencies at once… and from currencies going up, down or sideways.”
Hope that clears things up. Once again, for access to Jim’s IMPACT trades, look here.
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. Oh, about the cost of access to the IMPACT trades: You can hit the “subscribe now” button toward the bottom of this page for immediate access to a substantial discount from the regular price. There’s absolutely no obligation.
