- One “alarming” chart… and why it’s not really cause for concern
- But yes, there’s something else you should be concerned about
- Nine months of warnings… and your best chance to act on them, today
- The unlikely sector poised to lead the stock market the rest of the year
- Guess who’s still in business?… losing confidence in the Fed… rising to the defense of Rickards and Stockman… and more!
Be careful as you examine the following chart. It’s easy to draw the wrong lessons.
And don’t be misled by the front-page story in today’s Wall Street Journal: “Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.”
It’s tempting to think, Yes! Finally, the Chinese and the Russians are dumping Treasuries! Nobody wants them anymore! Soon Treasury prices will crash and interest rates will soar and those spendthrifts in the White House and Congress will finally get what’s coming to them! The deficit will spin out of control and Uncle Sam will be broke! No more welfare, no more crony capitalism, no more stupid foreign wars! Yes, things’ll get ugly for a while, but we can finally get a fresh start! We’ll be a free country again!
Sorry, it doesn’t work that way. Jim Rickards told us so during a Q-and-A episode of The 5 last month.
In the post-Panic of ’08 world, the big U.S. banks will always step up to buy the Treasuries no one else wants.
“They got bailed out in 2008, and first they were shellshocked,” Jim explained. “They were in a foxhole, and stuff was exploding over their heads. And they wake up in 2009 and go, ‘Wow, it’s over. We got bailed out. We still have our phony-baloney jobs, we still have our $1 million bonuses, nobody got fired, nobody went to jail. This is too good to be true. Isn’t the government wonderful? They bailed us out.’”
Ah, but at a price. “If the Chinese are going to dump Treasuries, the Fed just calls the banks and says, ‘You buy ’em or we’ll put you out of business.’ So yeah, there is selling pressure, but it’s being taken up by the banks.”
So… don’t look for any major disruption to markets or the economy just because foreigners are dumping Treasuries.
But corporate debt in emerging markets? That could “spill over to the financial sector and generate a vicious cycle,” says the International Monetary Fund.
The IMF is out this week with its semiannual Global Financial Stability Report. The current edition amounts to another one of those “warnings you’re not supposed to hear” — the kind Jim says are written in technical language and are read by only a handful of expert analysts.
But make no mistake — they are the power elite’s way of signaling each other: Danger ahead.
“Emerging markets should prepare for an increase in corporate failures,” says the report. That echoes a warning Jim has issued here in The 5 regularly since January — a $9 trillion wall of emerging-market debt, piled atop $5 trillion more of debt issued by energy companies. If only 10% of it goes into default — a conservative assumption, says Jim — we’re looking at a crisis six times worse than the subprime debacle that lead to the Panic of ’08.
So it’s not hard to read between the lines of the IMF’s sterile and stilted language: “When liquidity drops sharply, prices become less informative and less aligned with fundamentals, and tend to overreact, leading to increased volatility. In extreme conditions, markets can freeze altogether, with systemic repercussions.”
If you know how to seize upon reports like the IMF’s — these warnings you’re not supposed to hear — it’s like having a “secret key” to substantial gains in a short amount of time.
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Today, for the first time, we’re ready to hand over this secret key to a broader selection of our readers.
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It’s a “meh” day in the markets. The only meaningful movement anywhere is in the Nasdaq, down three-quarters of a percent — and that’s only because Apple is down 1.8% and AAPL makes up such a large percentage of the index. No, there’s no obvious Apple news behind the move.
Elsewhere in the tech sector, the buzz is about Dell — yes, Dell is still in business! — making a bid for the data-storage outfit EMC.
Treasury yields are up a bit, the 10-year at 2.08%. Gold is down a bit, at $1,145.
If any asset class is going to move today, it’ll likely be this afternoon when the Federal Reserve releases the minutes from its September meeting. Traders will then attempt to divine clues about when the Fed will finally jack up the benchmark fed funds rate.
As a reminder, Jim Rickards says the Fed is more likely to move in the opposite direction; look for a hint of more monetary ease early next year.
Then again, we’re at a stage when traders might freak out at the slightest provocation from the Fed.
Back in January, we said 2015 would be the year faith was lost in central bankers. CNBC is catching up only this morning, with a story headlined, “Has the Fed Lost Markets’ Confidence?”
The story is about a new research note from analyst Albert Edwards at the French banking giant Societe Generale. CNBC had to denigrate him as SocGen’s “famously pessimistic strategist,” but at least they’re giving him the time of day.
Edwards says bond traders no longer believe the Fed can generate the inflation it so desperately wants. As evidence, he points to a measure we’ve discussed before, the “five-year forward breakeven inflation rate.”
Essentially, it’s a guess at where bond traders see inflation five years in the future… and the number recently fell to a five-year low. Says Edwards, bond investors are signaling to us that they don’t “believe the Fed is in control anymore.”
Look for an upturn in the basic materials sector, advises Greg Guenthner of our trading desk.
How things have changed from earlier this year, as the broad stock market was treading water. “During the first and second quarters, the biggest, best-performing stocks stole all the thunder,” Greg reminds us. “If you weren’t trading red-hot biotechs or the most popular household-name stocks like Netflix or Amazon, you made squat.”
But now? “Many of the big names that were propelling traders’ profits over the past nine months are stuck in the muck.
“What we’re experiencing right now is sharp rotation into some of the stocks that a majority of investors have kicked to the curb this year. While former leaders continue to rest or sneak lower, sectors like metals and mining and energy are beginning to show signs that they could be bottoming out here. That’s a massive shift in market characteristics.”
If a young adult in your life is looking for a promising career in a lousy economy, perhaps he or she should consider “recess consultant.”
Seriously. The school district in Edina, Minnesota, just brought them on board. Reports the Minneapolis Star Tribune, “Some parents have welcomed the arrival of the firm Playworks, which says recess can be more inclusive and beneficial to children if it’s more structured and if phrases like, ‘Hey, you’re out!’ are replaced with ‘Good job’ or ‘Nice try.’”
The kids are understandably confused. “‘The philosophy of Playworks does not fit Concord [Elementary],” says parent Kathy Sandven “It is a structured philosophy — an intervention philosophy — not allowing kids for free play.”
“The level of Playworks intervention is up to each school,” the newspaper goes on “Some will use a coach that operates recess; some will use an on-site coordinator one week per month; some will give training to school staff.
“Forest Elementary in Robbinsdale Area Schools spends $14,500 for an on-site coordinator to spend one week a month at the school.”
Oy…
“Re: the Rickards and Stockman addition to Agora Financial,” writes a reader: “It is the best damn addition to Agora in a very long time, and most respectfully, I must call BS on those who claim otherwise.”
Writes another, “I have been following David Stockman’s blog for over a year now, and generally his commentary is well researched. He is an excellent analyst and understands the relationship between earnings, corporate buybacks and capex as well as anyone I have read.
“He has never offered specific investment advice — his blog is free — but I am greatly interested to see what he does have to say. He understands zero interest rate policy, whom it has benefited and who has lost as well as anyone, and he also understands how it will probably play out from its prolonged use.
“I think Agora has added some exceptional talent to its staff, first with Jim Rickards and now David Stockman.”
The 5: Well, thanks. As we said yesterday, Fed-bashers come a dime a dozen these days. We share their disdain, but you could have easily gone broke following most of them these last few years with their “imminent crash” and/or “imminent hyperinflation” calls.
Or to put it another way, we hope you didn’t buy bags of junk silver at the top in 2011 expecting it would be all anyone would take for day-to-day transactions by now. (It’s a variation on the hoping-Uncle-Sam-goes-broke theme with which we opened today’s episode.)
Anyway, we’re delighted to have two gentlemen of such caliber on our team. Purists might say they bring a checkered history — in the sense of David’s leveraged buyouts and Jim’s stint at Long Term Capital Management. But as we’ve intimated before, we think that makes their insights more valuable than some jamoke with a laptop and a copy of Mises’ Human Action (not that there’s anything wrong with Human Action, of course).
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. More from the International Monetary Fund report mentioned earlier: “Managing any outbreak of financial contagion will require nimble and judicious use of available policy buffers.”
Strip away the mumbo jumbo and here’s what you get: The Fed is on a tightrope without a net whenever the next crisis rolls around.
Too bad they can’t put it in plainer language. But as Jim Rickards keeps telling us, these are warnings you, the retail investor, aren’t supposed to hear. These are messages from global elites to other global elites.
Now, for the first time, we’ve discovered how you can apply these elite messages to generate gains of up to 1,616%… in a way that’s safer than how most people trade stocks.
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