Watch out!!!

I’m rejoicing at the recent all time highs in the stock markets. The money gained is real. But I’m also cautious. Let’s stay diversified and careful. We don’t really know what will happen. We need to be emotionally prepared for a downturn, even if it’s slight. Remember, for us, downturns are when investments go on sale. In my professional life, every decline in the stock markets has been a opportunity to create greater long term gains.

Read the article here.

What the 30 year Treasury bond is telling us.

On Wednesday, the government auctioned off $12 billion in U.S. Treasury 30 year bonds for the astoundingly low interest rate of 2.172%. These are taxable bonds. This means that the investors in these bonds expect essentially no economic growth in the U.S. in the next thirty years.

Consider what 30 years of “steady state” economic growth would mean.

It would mean that the stock market indexes should stall where they are or rise until the average dividend is lower than bonds, although individual issues should do well. Index funds gonna suck.
It means that we should all save much much more because average investment returns will be small.
It means that they don’t expect interest rates to rise ever. Cash and C.D’s will have zero return for the next thirty years.
It means the American Middle Class will stagnate or fade. Upward mobility will require either luck, educational prowess, or unique skills in wealth creation.
This suggests, that, should this interest rate be an accurate indicator, there will be substantial social unrest, perhaps even revolutionary movements, as the American economy withers and American frustration grows. All the central bank interventions and sweeping economic policies haven’t worked.
It seems to me that this is the biggest news of all. After all, there can’t be economic justice for any economic or ethnic group if the entire economy is fading.
Or investors are wrong, and this bond market is simply overpriced, and in a bubble.
We will only know by living through this. Eat your veggies.

The Great Capitulation?

The Great Capitulation. That’s a great description of what appears to be happening. Low interest rates are now being accepted as the inevitable environment for the near and distant future. It feels like the stock markets of the world will benefit from central bank support now and forever.

Capitulation is what market bottoms and tops feel like. The contrarian in me is creating an urge to go out and short the bond market. Had I done that in the past seven years I’d be totally wrong. But now…I’m wondering. And watching.

Read article here.

The fading middle class is the dominant social issue of our era, and will somehow affect our investment choices.

This article is by a leading economist. My thought is that the fading middle class is the dominant social issue of our era, regardless of politics. It is CERTAIN to have an effect on the financial markets, but what that effect will be, we cannot know.

Read the article here.

Salinas Californian Article from last Saturday

I continue to find lessons and indicators in the Brexit experience.

  1. In general, economically and culturally, Asia is rising. Europe is in decline.
  2. Immigration is a big issue globally. Britons feel swamped by unfettered immigration from Europe. That strongly affected their votes. I’m perceiving that the immigration issue was bigger by far than economic questions.
  3. Social anger is increasing. Many people feel they have lost ownership of government and are at risk of losing their cultural identity. Results: anger, alienation, separation, and fear. This was apparent in the “Brexit” vote. It is also apparent in the current angry American presidential campaign.
  4. Low and lower interest rates. Brexit demonstrates yet again that any crisis is a giant gift to the Federal Reserve. At this point the Federal Reserve can keep interest rates as low as it wishes for as long as it wishes, and blame Brexit.

Here’s my article in the Salinas Californian, to discuss this further.

Read here.

Persistence

As we prepare the 2nd quarter’s reports and I study the financial markets, I’m reminded yet again that intelligent persistence is a core virtue of successful investing. My son Eric, who is on our board of directors, recently sent me this link, and I think it’s very relevant. Press on regardless.

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Brexit? What Brexit?

Early thoughts on BREXIT: first, the vote last week was a non-binding referendum, which means that it was simply an opinion poll. Second, everybody seems intent on stalling any implementation. Third, the central banks are lining up to throw money supply at the problem. So this could be a big deal…or not. What happens next is literally unpredictable but probably we’ll all muddle by as we so often manage to do. Despite the rhetoric, we may discover that this was a good event, a bad event, or a non-event. Nobody really knows. So far it’s essentially been a non-event. Stay diversified. We are following this closely.

More on Negative Interest Rates

The LIBOR interest rate (London Inter-Bank Offered Rate) is the international interest rate which is used for many international loans and mortgages, including adjustable rate mortgages. The concept behind its creation and application was to create an international securitized mortgage and debt market.

At present, in some currencies the LIBOR rate is negative! With the Euro LIBOR set at -0.39% and the Swiss Franc LIBOR at -0.72%, a few adjustable rate mortgage holders in Euope are getting PAID for having mortgages!!! The banks behind those mortgages got hammered by their own fine print because they couldn’t perceive of a world with negative rates.

Negative interest rates are extremely unsustainable. They forecast a recession if not a depression for Europe, and they will possibly eventually destroy the European financial institutions caught up in this situation. They depress business growth in many sectors of the economy by taxing cash reserves. And, as suggested by those negative mortgages, they may be fueling an asset bubble in real estate and stocks. Imagine: it is actually less expensive in some places in Europe to load up on debt and buy something than it is to save. Astonishing.

Meanwhile the stock markets are rising, possibly fueled in part by those lower and negative rates. We are making money in our portfolios, and the world seems balmy. We are mere spectators to this negative interest rate insanity. We might as well watch and savor, as though observing the phenomena of the moment: a comet, an unusual rainbow, or an exotic wine. This season will pass, and one way or the other we will want to remember that we were here when the financial system inverted upon itself.

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Negative Interest Rates?

Bill Gross is one of the most successful fixed income investors in the 20th and 21st Century. His words are worth reading, for insight into what negative interest rates may be creating in the financial world. My own thought is that negative interest rates must be KILLING the international money market fund industry. Also negative interest rates are favoring non-bank share repurchases and other self-absorbed non-productive behavior. Note also the push to criminalize cash which Bill Gross discusses. Strange days indeed.

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