It’s the heart of hurricane season here in South Florida, and that means we always keep an eye on the tropics. In fact, there’s one wave out there right now that could impact our weather – and that I’m watching closely as a result.
Market Roundup
One thing you know (or learn quickly!) as a Floridian is that insurers won’t write new coverage when a storm is bearing down. The moratorium takes effect when named systems get within a certain distance of Florida, or when watches and warnings are issued by the National Hurricane Center.
Given how many insurers went broke when Hurricane Andrew devastated the region almost a quarter-century ago, it’s a logical, self-preservation step. The 1992 storm caused more than $25 billion in inflation-adjusted losses, second only to Hurricane Katrina in 2005.
In the markets, you never know when the next storm is coming. But it sure looks to me like “insurers” are writing policies all over the place – despite the very real risk of a financial hurricane approaching. And wouldn’t you know? It’s yet another distortion/side effect of very easy monetary policy.
|
|
| In the markets, you never know when the next storm is coming. |
Just get a load of this Wall Street Journal story on the collapse in the Volatility Index,. The VIX is sometimes referred to as a “fear index.” But what it really measures is the cost of using options to insure against a sharp decline in the S&P 500.
Right now, figures from the Commodity Futures Trading Commission show near-record levels of bearishness on the VIX (and consequently, bullishness on the S&P). Both historical, realized volatility, and implied future volatility, are also at near-record low levels. In fact, the S&P has only been this serene and quiescent a dozen times or so in the last half-century.
Why would volatility be so low, what with recent Brexit turmoil, uncertainty over the election, emerging market tremors, and serious questions about future Federal Reserve policy, among other issues? Because everyone and his sister is selling volatility insurance in the form of put options. They’re doing so to generate income since traditional yield-generating investments like bonds pay so little in today’s NIRP/ZIRP world.
The Journal had a great story earlier this week about how major pension funds are so hard up for cash that they’re selling hundreds of millions of dollars’ worth of put options to generate additional yield. ETF and mutual-fund providers are trying to rush funds out the door focused on the strategy, too, in order to capitalize on the demand. As Citigroup analyst Matt King said:
“Everything feels distorted and unnatural; you know the source of that is the central banks but equally there’s nothing to stop them carrying on.”
| “Everything feels distorted and unnatural …” |
None of this means the stock market has to crash today, tomorrow, or next week. But it does create the risk of future air pockets, a risk that gets bigger with every new insurance contract sold.
Or stated another way: Selling insurance is a great business … when you’re actually getting paid for the risk of doing so. It’s a great business when there aren’t any storms bearing down.
But previous periods of extremely low volatility and extremely high complacency haven’t lasted long. They’ve often been followed by significant turmoil too – turmoil that leads to big losses in short periods of time for sellers of market insurance.
What’s more, those insurance sellers are collecting very low premiums for their trouble these days. That didn’t work out very well for Florida hurricane insurers back in the day, something to keep in mind.
So what’s your take? Is this low-volatility environment going to persist? And should we continue to buy stocks aggressively as a result? Or is there a financial storm (or multiple storms) bearing down? How should (or are) you changing your investment strategy to account for that? Let me hear about it in the comment section.
Until next time,
Mike
|
 What’s behind the Fed’s “speak loudly and carry no stick” policy – and will it ever end? Several of you took to the website to offer your answers to that question in the last 24 hours.
Reader Nels said: “If the Fed leaves interest rates low, they destroy Too Big To Fail pension funds and insurance companies. If the Fed raises interest rates, they destroy other TBTF entities – like the federal government, several state governments, and a great many large companies, which have levered up to take advantage of low rates. Whatever the Fed does, it all ends badly.”
Reader Pat L. said: “The Fed is going to continue to shoot their mouth off about raising rates. The economy is going to continue what it is doing – namely perform poorly – especially with productivity going lower. Eventually the Fed will get lower and maybe even negative rates. Then if they get to negative rates, the explosion will occur. The call to fix or eliminate the Fed will get very loud.”
Reader Cindy added: “The times we’re in scream of 1929 all over again. When everyone tells you ‘Everything is okay,’ yet their actions tell a different story, it’s time to step back – way back. It’s going to implode.”
Reader Myron said it’s not up to the Fed to fix the economy. It’ll take much sounder fiscal policy. His view: “If we get a president who is serious about shaking up Washington, cutting corporate taxes, and repatriating corporate cash overseas, then we can get back to 3+% economic growth, and higher rates. But I think the next recession could turn into a global depression before we get back to a healthier economy.”
Finally, Reader Howard offered this take on what investors should do with their money in this environment: “Most Baby Boomers have been through boom and bust cycles before. I would imagine that the careful ones are now in protection mode.
“The Fed doesn’t make or grow anything. They don’t employ large numbers in manufacturing, retail, or in any productive capacity at all. They’ve used up all their ammunition and are now firing blanks in the air. Frankly I couldn’t give a toss what Janet and her band of contradicting misfits have to say. My money is safe, accessible, secure and ready for the mess the Fed has helped create.”
Great comments all around, and I appreciate you taking the time to share them. We’re experiencing a round of eerie calm in virtually all capital markets right now … but historical experience tells us that doesn’t last forever.
With so many distortions in the markets courtesy of experimental, aggressive monetary policy, the blow up could be one for the ages. So make sure you stick with the relatively conservative, safer strategies I’ve been advocating here and in my Safe Money Report. Don’t hesitate to add any more comments you might have here on the website either.
|
How can big money investors make more money on negative-yielding Japanese bonds than they can on positive-yielding U.S. ones? This fascinating Bloomberg story explains this seemingly impossible situation.
It boils down to the fact dollar-denominated assets are in such strong demand overseas that funds can earn a tidy yield for lending out their dollars to needy foreign investors. That more than offsets the negative yields offered on Japanese debt. Or in plain English, it’s just another distortion caused by crazy interest-rate policies worldwide.
The U.S. government’s Committee on Foreign Investment in the U.S. (CFIUS) gave China’s purchase of a key agricultural firm the green light. CFIUS reviews proposed acquisitions for national security issues, and ruled that China National Chemical Corp. can proceed with its $43 billion purchase of the seed company Syngenta AG (SYT). The agency has previously blocked deals in other industries, particularly technology.
The Ryan Lochte fallout continues, with the Olympic swimmer losing key endorsement contracts from the likes of Speedo USA and Ralph Lauren (RL). The Japanese mattress maker Airweave and Gentle Hair Removal also deep-sixed their deals.
Did you know you can earn a positive yield on negative-yielding bonds, or is this the first time you’ve ever heard of such a seeming contradiction? What do you think about Chinese firms buying up more and more American and foreign companies? How about the reaction of Corporate America to the Lochte mess? Share your thoughts in the comment section below.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 19 comments }
This no growth economy, fabricated by easy money is like a balloon floating around in a room full of needles. Never knowing where the fatal prick will come from.
My father often said “History teaches us one thing only and that is that we never learn!” We watched what trade unions did in England and then repeated the same steps in North America to the length that the “tail starts wagging the dog” and economic indicators and past performances should be a very real warning to us all, and yet the media and the so called pundits keep saying the same old, same old, that we’ve nothing to worry about! I for one am very worried and will take all I can from your newsletter and wealth report to guide me in the coming crisis. Good Luck and May the good Lord be with you.
October is a bad month so I am taking my IRA distribution before all hell breaks loose. Is the being conservative or chicken?
News Flash: Ripple – Banks can now
bypass US financial settlements. Bank
To Bank business internationally. I think
we might see the VIX come alive real soon.
For more see Ripple.com
Something similar has happened to the once-reliable Coppock index, as explained by John Hussman:
http://www.hussmanfunds.com/wmc/wmc160822.htm
Some have taken its recent trend to indicate a new bull market. In fact, the index is sending a false positive, because the current situation is so distorted (a dragged-out, two-year-long topping of major indices). It’s not a situation the index was designed for.
The Fed. Is covering by throwing around money, for what the Government does not do…..action to create a meaningful environment for Manufacturing jobs and school education. A D- on both for our government.
As a result they may make us feel that things are looking better, but it’s all smoke and mirrors.
The result will be a financial crisis of dimensions never seen before, and still no Meaningful jobs and inferior education compared to the rest of the civilized world.
In the short-term, it certainly looks like a selloff is setting up. We’ll likely see a routine summer to fall decline in the stock market at the minimum. After that, comes the big question of ‘will this be the one that pops the bubble?’ Something that warrants watching is the yield curve. If we do get a decent drop in the stock market, there will be the inevitable flight to safety to treasury bonds, with the longer-term durations having preference. That could flatten, even invert, the yield curve. Then the bottom will drop out of the economy, and there will be nothing the Fed or anybody else can do about it.
The Chinese government restricts exports of money by individuals, but allows it’s companies free reign to buy foreign companies. Doesn’t the U.S. government do something similar? Not that many American companies are currently buying foreign companies, these days.
The market is a debt fueled tinder box that could go off at any minute. The perma-bull class and their enablers in the lapdog financial press know that the Fed market technicians are not going to hike rates before December, and most of them don’t even believe it will happen then. I get the sense that market watchers think the fix is in – the powers that be will keep the Dow headed towards 20k until at least after the election. If you couple that narrative with the stats Mike mentioned on investor sediment (and low volume), it’s obvious Wall St is back to a recklessly complacent mindset.
The other side for investors to consider right now is the costs of Fed inaction, namely a weaker dollar and it’s impact on the crashing USDJPY rate. If the JPY goes under 100 and stays there, the Nikkeii will get hit. At some point, the US market will be out of options, it’s not IF, it’s WHEN.
I agree with what Nels wrote (see above in the “Our Readers Speak” section….namely the FED will need to move to address some structural issues, but will move slowly to avoid other as-critical structural issues. In addition, I really can’t see them acting before the election for fear of triggering a significant upheaval in the financial markets. And further, I’d be very surprised if they don’t make a 1/4 point move in December…..and then another 1/2 point total over 2017, taking a very slow and re-evaluate stance after each rate increase.
And if Congress, the Executive Branch, and Wall Street can find common ground, they should develop a policy to repatriate the hundreds of billions being held off shore in a way that will stimulate capital investments (not just dividends and executive suite payouts), infrastructure expenditures, and address the chronic middle class wage stagnation.
As for an investment strategy for the next several months, I’m assuming selective investments where principle is put in equities with strong market positions that optimally yield a 3% or more dividend return should continue to work for at least one more quarter. Going into the election, if HRC has a strong lead, I’ll re-evaluate where to sell and/or add more volatility protection in mid-November. If Trump looks like he has a realistic chance to win, I’ll do that decision-making prior to the election with a greater emphasis on selling and adding more volatility “insurance.” His election, I believe, would rattle world markets, not just the U.S. markets, i.e., our own home grown human Black Swan.
YTD, my IRA is up over 120% and my regular account is up over 40%, so I will be wanting to protect those gains while taking advantage of the current FED apparent decision to manage fiscal policy for the next few weeks through continued low interest rates and jaw-boning.
“How can big money investors make more money on negative-yielding Japanese bonds than they can on positive-yielding U.S. ones? This fascinating Bloomberg story explains this seemingly impossible situation”
The answer is they buy GOLD, Mike? It’s already sold and beaten down. It has a better chance of going up in the next 10 years than negatively priced bonds. Gold ownership is easily transferable and tradeable and protected from government medalling, failing banks and reclaiming with bail ins.
How about the reaction of Corporate America to the Lochte mess?
What is the point of winning a medal if you lose your credibility and are caught out as a liar?
Richard
You may want to consider he option that you can now store your IRA in gold at home. Your looking at a future of paper payouts for the rest of your years. If you trust paper well your OK then hopefully.
There are so many risk management strategies it would seem a key concern would be if companies are selling “naked” puts.
TOO MUCH ADVISE IS COMING TO AMERICANS. INVESTORS DON’T KNOW WHERE TO TURN NEXT. ONE ADVISOR WANTS YOU TO INVEST IN STOCK, ANOTHER IN DISSTRESS BONDS, AT BELOW THE ORIGINAL COSTS. ALMOST MAKES INVESTORS HEAD FOR THE HILLS. WHEN WILL THE ECONOMY RETURN FOR THE BETTER? MAYBE NOT IN MY LIFETIME.
Theirs growth in the economy for sure look at all the traffic congestion that’s on the roads. Think of all the single occupancy vehicles on the roads and all the motorways and flyovers that have been built.
Mike,
I have been trying to reach you but to no avail. The Prudent Consumer’s Guide to Trading Services is what I’m looking for. Need to find a cause for this guide. Can you find it for me? I would appreciate your help.
Dorothy Y.
Mike,
Appreciate your help.
Dorothy
The Federal Reserve claims to be data dependent. My question is how valid is the data? Organizations spin the data to benefit there efforts. I wish someone would examine the data in detail and present an accurate picture. There are liars, damn lairs, and statisticians.