A Look Ahead

 I want to start by looking back to the beginning of 2020.  Life was simple then; we could travel as we liked, hold social gatherings, go to the beach, attend music concerts, go out to dinner and the movies, and generally come and go as we pleased.  After Covid was declared a pandemic, the world’s health authorities closed the global economy, businesses were shuttered, millions laid off and free money was printed as a temporary stop gap to keep things afloat. 

 Twelve months later we are at the beginning of a vaccine roll out that will take time to implement and who’s effectiveness is being questioned but while we wait more money is being printed but many businesses are still shuttered or gone for good.  Some sectors of the economy have benefitted; logistics, software, delivery, golf gear (one of the few sports that is allowed, and which has seen a remarkable resurgence), video games, home health, fitness and entertainment and several other industries are flying, however if you are in the restaurant business, travel or leisure then you are either out of business or fighting for your survival.  One of the largest and most important industries, housing (at least in the USA) is intriguing.  Prices for housing are spiraling higher due to the limited number of homes for sale but banks are not allowed to foreclose on Covid victims who are months behind on their mortgage payments.  Once this bandage is removed there should be an avalanche of properties coming to market and this could undermine this industry right as the stimulus ends creating a massive drag on any economic growth. 

 Political unrest created by the Trump supporters and Trump himself has created temporary political chaos.  Biden takes office in a week and while I am not convinced that he is the man for the job he certainly will be a welcome change from what has turned into a barbaric exit to Trump’s presidency.  A new President, a new Treasury secretary in Yellen (another money printer) and an economy being kept alive with fake money makes it anyone’s guess as to how the market will react but the reality of the situation is that without depressed interest rates and trillions of fake dollars being printed the stock market would be well below current levels.

 Looking at some of the stock valuations shows an amazing picture.  Tesla with a market capitalization of over $800 Billion produces 140 times less cars than the top ten automakers but has a value higher than all those combined.  It trades at 30 times sales and 1,550 times earnings.  It is the most overvalued stock in market history, and this has catapulted Elon Musk into the position of the world’s wealthiest person even though his company makes no money and is only showing a profit due to carbon credits!  His net worth has jumped from $30 Billion at the beginning of 2020 to $170 Billion today, an increase of $140 Billion in a year or almost $12 Billion a month!

 Apple’s market capitalization soared by almost $1 Trillion in 2020 to $2.26 Trillion at year end.  It was only 17 months ago that it was the first company to reach $1 Trillion but despite lagging sales and profits the stock keeps climbing.  Although certainly not a growth stock, it now has a price to earnings ratio (P/E) of 40.5 up from 24.7.  In a normal market Apple’s P/E ratio would have been in the mid-teens but now is three times that valuation. 

 It is now the most overvalued stock market in history and into the 13^th year of the longest bull market in history.  The price to sales ratio of the S&P 500 is now 20% HIGHER than it was at the peak of the Nasdaq bubble in 2000, the previous record.  There is full blown stock mania in the USA where the small players are piling in just as they always do at market tops.  JMP Securities estimated that a record 10 million new brokerage accounts were opened in 2020.  Most of these are leveraged using margin to juice returns.  Options contract volumes have soared to 30 million contracts a day, 12 times the number traded in 2000.  The insane are running the asylum and this will not end well.

I was recently on the golf driving range trying to fix my golf swing (a never-ending job) and I overheard a few youngsters (market newbies) talking amongst themselves.  One of them was boasting that his day trading profits were so great that he was quitting his job to trade stocks!  Sounds like 2000 all over again.  Another person recently called me (another market newbie) to ask why his option contract had not gone up in value even though the market had moved in his direction.  There was no concept of time value, volatility value or other market driven option values and yet here he was trading options!

 Another crazy metric is the SPAC market.  For those of you who have been with me for a while you will remember that back in 2008 the SPAC market was hot.  A SPAC is a Special Purpose Acquisition Company, essentially a shell of a company that raises money and then buys companies with its cash.  Most of these have no credibility or plan; just invest your money and results will magically follow.  These companies raised $74 Billion in 2020 more than 5 times the previous record which also occurred at the previous market peak!  What are they going to acquire with that hard earned money?  As before, a lot of these SPACs will go to zero.

 The final stock bubble analogy that I will mention is the ARKK fund.  This is now the largest active ETF (exchange traded fund) in the world, and it is run by Cathie Woods.  Cathie’s fund has raised more money in the last two weeks than it did in its first 5 years, and she is now a regular on CNBC where she is touting her positions.  Cathie recently said that Tesla could go to $15,000 a share making Tesla worth $15 Trillion.  Tesla is the basis for her entire fund’s returns, and therefore it is outperforming the market however, back in 2000, there were similar Internet funds that went to the moon only to return to earth in a hurry when the market cratered.  The Jacob Internet Fund, run in 2000 by a 30-year-old money manager Ryan Jacob, was flying high on the New Era Internet stocks.  His fund lost 95.8% of its value when the NASDAQ bubble burst and I anticipate a similar exit for Cathie and her investors.  Interestingly today Cathie announced that she was starting a new fund for Space Exploration where she will invest in public companies involved in space exploration.  After the announcement Virgin Galactic stock surged 22%!  No news just a supply demand play.  This market has gone insane!

 Behind this madness is a Federal Reserve bent on printing money as the only way out of its hole and a government with a mandate to continue to support the economy at any cost.  The new mantra on Capitol Hill is Modern Monetary Theory (MMT).  Some people are now referring to it as Modern Money Tree as apparently you can print as much money as you like with no repercussions.  To the MMT proponents, history is irrelevant.  The tales of woe of the Weimar Republic, Argentina, Zimbabwe, and other economies that printed money without concern are irrelevant.  Their problems of hyperinflation and economic collapse are due to their lack of understanding of modern economic theory so it will be different this time!  Not that I anticipate a return to hyperinflation any time soon but if there is not a check on monetary growth, global inflation will return and with it higher interest rates which any debt ridden individual or country knows is the death knell for balanced budgets and repayments.  This weakens the economy reducing tax receipts and down we go.

 While I am still not convinced that inflation will rear its head soon there are already several warning signs; copper is up 27% in 2020, oil has recently past $53 a barrel and this is before the return to normal travel, the dry goods freight rate is up from below $400 a day to over $1,700 a day, and the USD has declined more than 12% against a basket of currency (all imports into the United States have increased in price).  On the local front I have witnessed the cost to construct a new property climbing from $200 a square foot to $250 a square foot due to lumber and labor shortages.  While these metrics have not fed into the Federal Reserve’s measure of inflation, they are showing some market froth, and this is starting to create a concern in the inflation camp.

I cannot see a way for the Federal Reserve to extract themselves from this mess without a market collapse and a recession to wipe clean all the excesses.  The problem is that the market is so overvalued that anything short of a 75% correction will not do the trick and I doubt that the Federal Reserve (particularly with Yellen now the Treasury Secretary) will stand by and watch that happen so more money will be printed creating a larger problem and a bigger collapse.  Stay tuned but 2021 is going to be a very interesting year it just remains to be seen whether the madness will continue or whether reality will finally restore order.

 As always, I will monitor the markets daily.  Once the music stops and the market finally bakes the reality of the situation into stock prices, I plan to act but at present I will wait until the bandage is ripped off and the true state of the global economy revealed.  In the interim I will not be participating either long or short but will patiently wait for the collapse, sidestepping the volatility and continue to produce excellent returns for all of us throughout this crisis.

Don't Mess With The Bull!

What a difference a week makes!  Prior to this week the markets were once again on a tear to infinity and beyond (to quote Buzz Lightyear).  Up more than 7.50% in three months and all of this while the Federal Reserve is raising rates and removing $50 Billion a month in liquidity.  The breadth of the market had shrunk to just a handful of names pulling the markets forward and the cheering from the sidelines for Apple and then Amazon to eclipse the $1 Trillion market capitalization mark was unbearable.  The market had finally lost all links to reality and was tearing higher based on hope and the euphoria of the previous decade of success.

A week later and most of that gain is lost.  The losses are being blamed on short term profit taking and the fact that we are entering earnings season so company buy-backs cannot support the market for the moment.  Hold on a second, the market is rallying because the people who run the companies and who have no skin in the game other than their gifted stock options are using the money given to them by cheap loans to buy their overpriced stock so that they can benefit from the increase in the price of the stock and THIS is what is supporting the market!  Wow reality definitely has left the building as who in their right mind would invest money into the market if this was the reason for market strength?

Looking at reality shows a starkly different picture.  Yes, we have an historical low unemployment rate and yes company earnings have been solid BUT the worker participation rate is still at multi decade lows and the Federal Reserve is raising rates and withdrawing liquidity.  To date the impact of the withdrawal of liquidity has been muted as the central bankers outside the USA continued their lax policies.  This has now changed as Europe and Japan are removing their support as well.  Added to this the trade wars that Trump is waging with the rest of the globe are creating issues at home in the bond world as previous large purchasers of US debt, namely Japan, China and Europe, are now shunning the new issues moving the price of the bonds lower and propelling the yields higher. 

I have been saying for a long time that should the 10-year Treasury yield reach 3.50% that the market would be in trouble and recently it reached 3.23% within 27 basis points of my target.  This was the inflection point for stocks which have sold off fast pushing the 10-year yield down to 3.14% or almost 3.00%.  I doubt that the yield on the 10-year has reached its peak yet as the Federal Reserve is continuing to raise rates and the government is running a massive $1.4 Trillion deficit and therefore has to sell more debt into a weak market.  Both actions should continue to drive rates higher in the short term but once the market breaks I expect a sharp reversal in rates as the Fed pushes them down artificially once again.  In fact, as far fetched as it seems, negative interest rates will be the norm, but we will have to wait for that to unfold.

How do you run a $1.4 Trillion deficit when you are in the longest expansion known to man?  Surely by now you should be running surpluses as was the case back in 1999?  And what does this mean when a recession finally hits, and you are called on to support the economy?  Where is that money to come from?  There are so many questions surrounding this issue it is like opening Pandora’s box, but the short answer is that you are in a world of trouble BEFORE the market collapses so the only thing you have left NOW is to raise taxes and cut expenditure killing off what remains of the market rally.  The strategy used to support the market of cheap money is now gone and once again has not worked!

As the market is in the longest bull market in history, the only remaining reason for the markets to rally is that consumers must be buying products left and right and are flush with discretionary cash.  As I have mentioned before, while the economy has recovered somewhat, and the unemployment rate is at all-time lows, not many have felt the benefit.  The fat cats in their big leather chairs, flying to work in their helicopters and going to trade shows in their private jets have felt the impact of the support but they are alone.  The average consumer is stretched with massive credit card debt, automobile debt, student loan debt and housing debt and with interest rates rising all of these are now costing them more each month.  Furthermore, with labor participation rates at historic lows wage increases have not kept up with the rate of inflation so the purchasing power of the consumer has weakened over the past 10-years not strengthened.  On top of these issues the price of oil has crept higher and is now over $70 a barrel up from $40 a barrel less than two years ago.  That is a 77.50% increase in less than two years.  Healthcare expenses are up around the same rate of increase and heaven help you if you make some money as once you move off the subsidized health care programs to private programs rates triple!  So no the US consumer is not the bastion of support and this along with reduced international trade will severely impact company results in the coming quarters.

Already we are seeing the impact of the rate increases.  Last month house sales fell 1.5% year over year and car sales fell by around the same amount.  Both industries are large employers and the ripple effects of a slow down in these two industries will be wide felt.  As an example, the slow-down in the automotive industry will be felt in the chip world as autos are a large consumer of tech innovations and the chip makers are already reeling from lower smart phone sales and the lack of orders for personal computers. 

With all of these roadblocks ahead I cannot imagine that the markets can recover from here, but I have been wrong for so long that even I am starting to wonder if a rally is not just around the corner.  What I do know is that money printing has never worked, every interest rate hike cycle has ended in a market correction or a recession and every bull market ends in a bear market.  There is no such thing as a Goldilocks economy as things are always overheating or too cold and humans constantly think that they can “improve” the situation with tinkering and the Federal Reserve is no exception.  But as Clint Eastwood said’ “Don’t mess with the bull young man or you’ll get the horns” or in this case a bear market.

A House of Cards

"Money is the Mc-mansion in Sarasota that starts falling apart after 10 years. Power is the old stone building that stands for centuries. I cannot respect someone who doesn’t see the difference.” - Frank Underwood in The House of Cards

One of the main reasons for limiting my blog posts is that they were starting to sound a bit like a broken record.  Since I started them almost 10 years ago it seems like I have spent the majority of my time warning against the excesses of money printing.  These excesses have to lead to a monumental market capitulation unless money printing continues unabated AND at an accelerated pace.  As both of these criteria continue my doomsday predictions have been wildly off the mark.  Not only has money printing continued, but after the Federal Reserve reduced its money printing efforts the combined might of the rest of the world’s central bankers jumped into the fray not just offsetting the Fed’s reduced participation but expanding the global monetary base.  With this tinder continually being fed into the roaring blaze that is the stock markets of the world, the result is unbated increases in equity prices. As I write this the markets are on a continued tear to infinity and are breaking records daily.  In fact, 2017 has turned out to be one of the smoothest periods of unabated stock market growth in all of history and this is after 8 years of a bull market!  At this late stage in the game you would expect some form of volatility but by all measures risk is off the table.  Forget about a correction (a drawdown of 10% or more), this stock market hasn’t even had a 3% drawdown in all of 2017, the second longest stretch in US stock market history.  Bear funds and ETFs are closing in record numbers and the new millennials are mega bulls as they have never experienced a correction! 

Old hands like myself are not at all optimistic.  I have seen this story all too often before (1987, 1997, 2000, 2008) so why should it be any different this time around?  Certainly, the length of the bull market has many professional investors amazed particularly in light of the weak economic recovery and there is a sense of despair among many sages of Wall Street who see the inevitable but cannot for the life of them fathom why the market continues upward.  Well things recently changed dramatically as the Federal Reserve announced that it would start to drain money out of the market at a rate of $10 Billion a month for the first quarter and then increase the withdrawal by an additional $10 Billion a month each quarter thereafter until they reach the maximum of $50 Billion a month.  Effectively they are starting with a pea shooter (limited impact as the market has shown) and rapidly growing to a rocket launcher which is sure to kill off the market.  I doubt that the market will wait for the rocket launcher and will wilt long before that cannon arrives so to me the time is near.  Whether the market dies this year or next no-one can honestly say but the reality is that this market has been propped up with the excesses of money printing and it will die with the lack of it.

My investment strategy throughout this period has been to ready myself for the inevitable by building up a steady and secure cash flow stream that will allow me the opportunity to jump in when things finally collapse.  As always, I am not looking to time the market (if I was I would still be long stocks and would sell them all at the exact highs) but to wait patiently for the buying opportunity to present itself at which stage I have my cash reserves ready to take advantage of the market malaise.  This to me is the prudent way to invest and I have been encouraging long term readers to do the same.  Those that have will survive and thrive, those that are overexposed will suffer and those that are leveraged will see their net worth disappear.  So, while it has been a long lonely ride to this place, I expect the not too distant future will provide amply.

Bubble, Bubble, Toil and Trouble!

"Double, double toil and trouble; 

Fire burn and caldron bubble. 

Fillet of a fenny snake, 

In the caldron boil and bake; 

Eye of newt and toe of frog, 

Wool of bat and tongue of dog, 

Adder's fork and blind-worm's sting, 

Lizard's leg and howlet's wing, 

For a charm of powerful trouble, 

Like a hell-broth boil and bubble." - William Shakespeare

I mentioned it in the last letter but it is worth mentioning again, by any metric that you can find we are in a bubble (apologies to Shakespeare as he says Double not Bubble but close enough for this blog).  Simple economic mathematics shows that the result of printing money and holding interest rates at below market values is the over-inflation of asset values.  It was just a matter of time before it happened but even the Federal Reserve has now mentioned that asset values “may” be a little high.  By the time they are saying this you can bet that we are in the final throws of the bull market.  That said they still have not learned their lessons and continue to believe that their money printing techniques (that have never worked) can magically manipulate market prices removing the chance of even the slightest drop in economic expansion.  Bernanke stated when he was the Federal Reserve Chairman that “we’ve never had a decline in house prices on a nationwide basis”, right before the property bubble burst.  Now we have Yellen saying that we’ll never have another financial crisis!  Wow the egotism and the ignorance is unbelievable and this is from the most powerful market manipulator in the world.

I have also mentioned repeatedly that economic growth can only resume at a healthy clip when you remove the shackles of debt.  While the Federal Reserve has stopped printing money the rest of the world’s central bankers took up the mantle and have bludgeoned forward mindlessly printing.  This has resulted in the massive run up in stock prices.  These stock prices require this fuel to keep them airborne so when you have Yellen and others start to talk of cutting back on their stimulus there is going to be a fall out, it is just a matter of time.  As with all fall outs the most egregious benefactors will be the hardest hit.  Think of say Tesla with a $60 billion market capitalization and losing $400 million a quarter, or Snap Chat (never made money), or Twitter (same) or a myriad of other stocks and you get the picture.

So, taking Yellen’s comments at face value (I assume that she was not joking although I secretly hope that she was) what will the Federal Reserve do when the market takes a nose dive?  Well for one they can drop rates from the lofty 1% mark that they raised (now that should be really helpful, NOT), or they can print more money and add to the $15 trillion of debt onto the global central bankers’ balance sheets (this has never worked and never will but I am sure that they will try once again), or congress could reduce taxes and increase spending right when they are talking about balancing the budget deficit.  This time around the tools at their disposal are significantly curtailed and while they will no doubt try all of the above the results will be even more feeble than those we have witnessed to date.  Not only has this been the weakest recovery in the history of the world but with the massive buildup of debt the next recovery will be even worse.

I am sure that this will not stop our egotistical maniacal leaders from proving once and for all that their strategies work.  This will mean tens of Trillions (billions will be SO 2010 darling) added to the Federal Reserve’s balance sheet plus negative interest rates (you will now have to pay the bank to place your savings there).  Once again this will kick the can down the road however the recovery will be even more anemic as massive increases in debt DO NOT STIMULATE AN ECONOMY.  Growth stimulates an economy and growth comes from innovation and entrepreneurialism not debt.  Debt becomes a yolk that must be dragged around slowing down the cogs of capitalism grinding the economy down to its knees.  This is why the economic expansion has been weak and why, given the policies of the central bankers around the world, we will suffer for decades to come.

Rate Hike Ahoy!

"If ye thinks ye be ready to sail a beauty, ye better be ready to sink with her!" - Pirate saying  

There is so much talk about the next rate hike.  According to the “experts” there is a low probability of a rate hike in November but a high probability in December!  I guess at some point they will get it right but the last time the Federal Reserve raised rates was a year ago and by now we were supposed to have had four more.  Furthermore, they have not raised rates other than that once in a decade!  Their European, Chinese and Japanese brethren continue on with measures that should ensure that their yields continue to fall even though they are below zero in many instances.  The reasons for the continued “stimulus” is due to a continued weak global economy which is hurting the revenues and profits of multinational companies around the globe.  S&P 500 revenues and earnings have been shrinking for more than a year but somehow with more “stimulus” there will be a magical hallelujah moment that will magically reverse years of perverse policy decisions.

As you can tell I am not at all in favor of the measures being taken and when you factor into the equation the choice of bad or worse presidential outcomes I find it incredibly hard to see any chance of a rate hike this year.  In fact should they throw one out it will be much like a life raft from the Federal Reserve to show their independence more than due to economic strength. 

So let’s assume that they do raise rates another 0.25% to 0.50% I would have to imagine that the markets will take it on the chin.  How ridiculous that a second quarter point move twelve months removed from the last one is so feared.  At that level we will have interest rates at 0.50% people!  If half of one percent can cripple an economy, how weak is that economy?  Well as I have mentioned above, the world economy is in dire straits.  China (although they will not admit it) is on the brink of a recession and Europe, post Brexit, has massive problems of its own.  Japan may remain stagnant forever particularly when you factor in the ever growing government intrusion into business and the markets.  So yes a mere quarter point move when the world has a massive hunger for yield will cause a huge spike in the dollar undermining revenue and profits further and could easily drag the economy into a recession.

To me the obvious place to look for reasons why things are so weak almost a decade after the Great Recession is the Federal Reserve itself.  They have been on a massive debt binge and have managed to convince their cohorts around the globe that this is the only way to stimulate.  Pile more debt onto the world economy and viola everything will be fixed!  Anyone who has read this last sentence can immediately see the folly in that but for some reason they cannot.  Amazingly neither can their peers who not only have embraced the policies but have expanded “stimulus” beyond our wildest imaginations by taking rates to below zero and concocting ever more ludicrous ideas.  Why not start paying all the unemployed to not work, now that would be a winner!

In fact it is not too bad of an idea as it would stimulate demand for products which is what the world needs desperately.  The current use of “stimulus” has crowded the private sector out of markets and is manipulating global markets that used to be free to correct on their own.  The drag created by the overzealous central bankers is now a noose around the neck of global growth and until it is removed it will continue to slow to a halt.  At that point, and it is not very far away, no matter how much more “stimulus” is thrown at the problem all it will do is drive it further into the quagmire.  It is at this point that markets will lose faith in the central bankers of the world and watch out below.

For these reasons I am very comfortable staying out of the markets and waiting patiently.  Once the markets are at a level where there is true value, I plan to jump in and ride the wave of euphoria that will be the relief to be rid of the shackles of the Federal Reserve.  Where that number is will be seen at some point in our future but if I had to place a bet I would say that the lows of 2008 will be taken out.  Take this as a warning and position yourself accordingly.

The Good Old Days

"Wish we could turn back time to the good old days;
When our momma sang us to sleep but now we're stressed out." - lyrics to the song Stressed Out by Twenty One Pilots

I know I have been off the air for a month but it is summer and time for a break right?  In all honesty while it was partially a break, the lack of correspondence was more a factor of too much work on my plate so something had to give and I chose to let the blog go for a month.  That said not a lot has changed in the last month; more hot air from the central bankers of the world, more stimulus and a couple of very poor candidates to chose from to run the country.

I was reminiscing over the last few weeks about what life used to be like in the "good old days".  It is hard to even remember a time before 1995 in the investment world but it seems that with the advent of the Internet everything changed.  To me those were the good old days when central bankers of the world operated in a relatively insulated bubble, focusing on their local economies.  Stimulus was left to tinkering with interest rates and bank reserves with limited open market manipulation.  Recessions came and went as a normal course of business.  Companies were valued on their balance sheet strength, growth opportunities and profitability.  Global debt (businesses, consumers and government) according to The McKinsey Global Institute stood at around $30 Trillion.

Fast forward to today and global debt is north of $200 Trillion or roughly $27,000 per person!  Furthermore the central bankers of the world have decided that $130 Trillion in 20 years is not even close to enough so they are pushing even more debt out into the market.  Just this month the BOE, Bank of Japan and the ECB have announced additional stimulus amounting to more than $50 billion a month!  What are we supposed to do with all this additional debt?

The idea is that we spend it on useless things like another iPhone or a new car (both of which are direct direct beneficiaries) however all that this stimulus does is bring future sales forward stealing economic growth from the future.  An example is China who reduced the tax on automobile purchases to 5% from 10%.  This stimulus increased automobile sales in China to north of 26 million units in the quarter but this incredible run will surely end when the stimulus ends at the end of the year.  People do not need new cars every year and looking forward the result of the stimulus will be to destroy automobile sales in China next year.

The issue is that adding more debt is not helping but is crowing out the normal private market and economic growth.  This crowding out is cutting heavily into GDP growth rates but is shown in its stark reality when you look at Wall Street.  In 1998 when "stimulus" had just begun under Greenspan, the number of companies publicly traded peaked at just over 8,000.  Since then the effect of all of this debt has been to crowd out the public markets and the number of listed companies is now half of what it was.  Some of this has to do with poor management however the bulk of the change has been from companies using debt to acquire other listed companies or management teams taking companies private using debt as the lever.

Not only have companies been using debt to acquire each other, they have also been turning to debt to juice their poor results.  Issue debt, buy back shares and hey presto you have better than expected earnings per share!  In fact companies are so awash with debt that some of them have massive negative tangible book values.  Remember that tangible is something that is real like a desk or a car whereas intangible is imaginary like Goodwill.  In the case of IBM as an example removing $42 billion of goodwill and intangible assets results in a negative book value of $25 billion!  Broadcom is not much better with a negative tangible book value of $22 billion.  Who would ever buy these shares and why are they even listed?

Looking at the balance sheets of some big names it just amazes me that more attention is not given to the balance sheets of businesses.  Microsoft now has $55 billion where not too long ago it had zero, Oracle has $43 billion, Apple has $85 billion, Intel $24 billion, IBM $44 billion and Cisco is at $29 billion.  Now while these companies are large this debt burden is enormous.  Heaven help them if at some point int he future interest rates rise and they cannot repay the debt!

But while interest rates are low the party continues and my analysis points to low interest rates for a while to come.  Not that I think that interest rates should be low, they should not, but because the central bankers of the world are going to continue to manipulate them for as long as possible.  They will also continue to print money in a vein hope that one of these dollars will eventually stimulate the global economy.  How ignorant and blind are they?  This is the biggest experiment known to man and one that has no chance of working out well.  The problem is that while ALL of the central bankers of the world continue to push money into the pot together there are no real repercussions.  Everyone's interest rates remain low or continue lower and everyone's currency weakens at the same rate.  No-one gains the upper hand so they try even more "stimulus".  Bond yields continue to wilt and it is just a matter of time before helicopter money policies are used (by passing the banking system and sending money directly to people).  Already there is talk of a perpetual bond (one with no end) and other crazy schemes but the results are all the same - nothing but a large pool of debt!

In this world of unbelievable craziness comes the demand for social policies and walls from the electorate.  Voters are turning to politicians who are promising things that are not only detrimental to long term growth but to the viability of capitalism.  It will not be long before capitalism is pointed to as the root of the problem.  However, it is not capitalism that is creating the problem it is the manipulation of the very fabric of free markets, the heart of capitalism, by the central bankers of the world, the supposed protectors of capitalism, that is at fault.

So while it is impossible to bring back the good old days it is possible to protect yourself and your portfolio by extracting yourself from debt and moving into gold or other assets that are antifragile.

There's Gold in Them There BREXITs!

Yesterday Britain voted to exit the European Union the so called BREXIT.  As expected the decision was close but the result was unexpected and threw global markets into a frenzy.  The European markets took the brunt of the selloff with Germany down more than 8%.  US markets reacted in less of a panicked fashion but were still off more than 3% at opening.  The initial knee jerk reaction will probably be muted in the short run as the actual exit will take a number of years to effect and it remains unknown as to what sort of impact this will really have on the UK and the rest of the European Union.  Certainly the press and the economists of the world are having a field day predicting a catastrophe but as we all know these predictions are more often than not vastly exaggerated.

I for one am not even going to try (in this blog at least) predict the long term fall out of this decision but there is a chance that other European countries try to exit as well causing the downfall of the EU.  This may well happen but the main question is whether the core group of nations remain and I believe that there are sufficient benefits for the 6 largest economies to remain unified regardless of whether smaller outlier countries exit (not that the UK is a small economy but the UK has sat on the fence of the EU since it was created so the result of an exit should be less impactful than one of the core group of nations exiting).   So while the markets of the world gyrate wildly to the unexpected news it is my thought that in the long run the overall impact will be muted.

That said the vote exposed just how annoyed the world is with their various political bodies.  Not only did the UK snub their noses at the incumbent party leading to the resignation of the Prime Minister, but now there is renewed talk of Scotland leaving Britain.  The United States is no different in that Trump has achieved a level of success that few believed would be possible without a population that is resentful of their leaders.  With the vast majority of Americans feeling that their politicians are out of touch with their plight plus the increasing divide between the have and the have nots it is clear that a change is inevitable.  It is just a shame that this desire for change was not directed towards a candidate with real leadership qualities that could infect rational change rather than a crass bully but unfortunately the desperation has been misdirected.

The other thing that should be clear is that precious metals and particularly gold are a hedge against the current malaise of the world.  Gold spiked more than $70 an ounce after the BREXIT was announced.  As opposed to the collapse of the global markets gold rallied more than 6%!  Gold stocks also went into orbit with some names up more than 10%.  It is amusing to me to listen to gold haters argue about what a poor investment gold is when during times of crisis it has repeatedly proven its worth as a hedge against disaster.  If you believe, as I do, that the world is clearly on the wrong path then owning gold, gold stocks or gold ETFs is a must.  Even if you hate the idea of owning gold today should be a signal that gold will provide downside protection for your highly overvalued stock portfolio.

So take note and realize that there’s gold in these BREXITs and other global catastrophes particularly when you have the world’s central bankers determined to destroy any kind of fiat money value.  Take this as a warning and position yourself accordingly.