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Mike’s Moves to Make Buy: Defense stocks, food and beverage stocks, infrastructure stocks (on pullbacks), very short-term fixed income ETFs or funds Sell: REITs, housing and mortgage stocks, home improvement retailers, long-term bonds and bond funds, emerging markets, oil |
Remember my warnings about “Bloody Wednesday?” I invented the term to describe the chaos that Federal Reserve interest rate hikes would unleash on the markets (since Fed meetings conclude on Wednesdays).
Boy, did my forecast ever pan out last year! Within a few short weeks of the December 16, 2015 rate rise, volatility exploded, gold surged, and the Dow Industrials plunged by more than 2,000 points.
In part because of that turmoil, though, the Fed went into “chicken out” mode. Instead of delivering a few more rate hikes in 2016 – as the Fed itself forecast it would – policymakers kept inventing excuses not to.
But the jig is now up. The Trump-Quake unleashed by last week’s election all but guarantees the Fed will have to hike again at its meeting on December 13-14. It also radically boosts the chance of multiple Bloody Wednesdays in 2017.
Crazy? Not at all – and I’ll tell you why. The Trump administration is talking about unleashing massive debt-funded, tax-and-spending programs the likes of which our country hasn’t seen in decades. Up to $1 trillion in infrastructure spending (partially funded through public-private partnerships), large corporate and consumer tax cuts, regulation cuts, and more are coming down the pike.
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That should boost economic growth in Trump-sensitive sectors, at least in the shorter term. But it will come at the cost of higher inflation, higher deficits, and higher debt. Estimates of the potential impacts are all over the map because no one knows exactly what Trump will propose or knows how much of his agenda will pass Congressional scrutiny.
But one non-partisan group, called the Committee for a Responsible Federal Budget, estimates Trump’s programs will boost Uncle Sam’s debt load by $5.3 trillion over the next decade. As a percentage of GDP, our debt would jump to 105% from 77%.
A separate non-partisan group called the Tax Policy Center estimates Trump’s tax plans alone will boost our debt load by $7.2 trillion over ten years. One analyst, Mark Zandi at Moody’s Analytics, said our deficit could balloon to 10% of GDP from around 3.5% now. The corresponding surge in growth and inflation could force the Fed to jack interest rates up to a whopping 6% by 2018 from just 0.25% to 0.5% now.
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| Higher short-term interest rates are coming from the Fed. |
Again, the precise details remain to be sorted out. But the trend is clear: Higher short-term interest rates are coming from the Fed. And the more fiscal stimulus we get, the more aggressive the Fed will have to be, something Boston Fed President Eric Rosengren just warned about in a speech this week. That could lead to some wild market moves, and more “Bloody Wednesdays,” in the months ahead.
Of course, the Fed only controls short-term rates directly. Bond market investors drive longer-term rates with their buying and selling decisions, and they’ve been selling like mad since the election. That has made the last several days one of the bloodiest on record for anyone who didn’t follow my advice and stay the heck away from long-term bonds!
Some figures to ponder:
- Globally, bonds have already lost more than $1.2 trillion in value over the span of only a few days. That makes this one of the worst bond market crashes in the last 20 years.
- Treasury bond futures alone have plunged more than 25 points in price since July. That’s the worst wipe out since the 2013 Taper Tantrum. Ten-year note yields have surged almost a full percentage point to 2.28%.
- The 2-year Treasury also briefly topped 1% for the first time since December 28, 2015, while 30-year mortgage rates surged by half a percentage point to the highest since January.
So what does this mean for your investments? What strategies will help build and protect your wealth in an era of Bloody Wednesdays?
First, keep avoiding long-term bonds. Treasuries. Munis. Emerging market bonds. Mortgage bonds. It doesn’t matter. Individual bonds, as well as bond mutual funds and bond ETFs that hold longer-term debt, are already getting hammered. That pain is only going to get worse over time.
Go through the list of every fund you own and check their average maturity and/or average duration figures. All fund companies provide this information. If the numbers are greater than two or three years, you’re in trouble. Rising interest rates will pummel the value of your funds.
Second, get the heck out of things like Real Estate Investment Trusts (REITs). Not only are they interest-rate sensitive, meaning they lose value in a rising rate environment. But both REITs themselves and the underlying commercial real estate they own is wildly, massively overvalued thanks to the titanic “Everything Bubble” that central bankers inflated with their reckless policies over the past eight years.
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As the U.S. Fed is forced to raise rates, and long-term bond yields rise, that bubble is going to pop. It will do so at the same time lending standards are tightening, delinquencies on property loans are climbing (a topic the Wall Street Journal covered this week here), and supply growth has been out of control in sub-sectors like multifamily. Talk about a recipe for disaster!
As for housing, the surge in home mortgage rates over the past week caused purchase and refinance application volume to plunge more than 9%. Further increases in rates will drive monthly payments for prospective buyers even higher, taking some of the air out of home sales and home price growth.
That’s bad news for housing and construction ETFs, as well as mortgage and housing-sensitive stocks.
Third, buy stocks that will benefit from a Trump-engendered spending binge and Trump administration policies. I gave a general overview of some of the favored stocks and sectors in last week’s Money and Markets column.
But I went much further in two critical Flash Alerts that I sent to my Safe Money Report subscribers in the past week. I “named names,” and provided specific recommendations, on investments poised to soar (or sink) in a Trump regime. Be sure to take action if you’re a subscriber, or get on board right away by clicking here if not.
Whatever you do, don’t just sit there and freeze up. With more Bloody Wednesdays headed our way, you have to get active, get prepared, and make adjustments like those I recommend in my Safe Money Report. That way, we’ll all make it through this new era in better shape together. And as always, be sure to share any comments on my columns in the discussion 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.
{ 37 comments }
I love your narrative Mike but the projection game has be somewhat cloudy as of late. After the Trump election gold was supposed to skyrocket and the market tank. Exactly the opposite happened. Its a topsy turvey world hard to forecast. All Trumps promises are driving the stock markets around the world into the stratosphere. Nothing makes sense so I am just waiting and watching waiting for some sort of normalcy to return if it ever does again.
Never mind bloody Days,Im looking forward to weeks and months.
So what about the dollar? Is there a likely battle between a decline due to debt and a rise due to higher interest rates?
Mike, I do not expect the Treasuries sold to fund infrastructure work to all be purchased by the public. Nominal long term interest rates would go up too much, squelching the RE market. Many of the Treasuries will be purchased by the Fed (Ben Bernanke’s helicopter money, as touted much at Davos). Thus, nominal interest rates will be capped. With inflation increasing, real interest rates will plunge as soon as helicopter money is mentioned. Thus, TIPs at close to 1% real yield currently are a steal, IMO. Your thoughts?
Larry
IT IS THE TIME TO DO GOOD BUSINESS AND HELP PEOPLE
Didn’t we spend $7 T on shovel ready jobs under Obama? Oh, he must have been talking about his political infrastructure instead, and you know what they shovel. The debt rose from $10 T to $20 T over 8 years and nothing got built. Or is debt different than debt load?
You were just not paying attention or live in Indiana. . A lot of infrastructure was done on interstate highways.
You forget that there is a lot of waste in Washington. I believe the President has the power of executive authority to freeze hiring and pay. Therefore, retirees and quits would not be replaced. Congress could cut all budgets except defense by 10%. Then they could consolidate the 20 departments that oversee job training programs under the Labor Department. The public would see no effect except for lower rents in D.C. Defense could stop the practice of using junior officers to oversee contractors and instead use colonels and above to monitor contractors. Junior officers fresh out of school do not have the experience or maturity to deal with middle aged corporate employees.
Mike,
I have been in Real Estate for over 50 years. Invested heavily in REITS in 2009 and have done quite well. As rates rise, rents will follow. RE fundamentals have never been better and your prediction that REITS are bad is just wrong. Over the long haul, REITS have been among the best
Investments.
In other words, sell low and buy high….
The dire predictions about increased debt and debt to GDP ratios do not include any assumptions they made that would help qualify their assertions. For instance, what GDP increase did they assume?; For the public/private partnerships, what % private vs public did they use?; When did they assume the spending would start versus other policies like tax and regulation reduction? At what rate would spending occur? If you can boot start the growth with tax cuts and not start the spending for 2-3 years that would change the equation on debt to GDP ratio. The bottom line is we get no information and all prediction from the 3 sources….how do you decide what the real effect will be? And don’t forget, Moodys was one of the rating agencies that completely missed the boat on CDS’s and all the exotic derivatives that lead up to and fueled the debt crisis in 2008 and in particular, Mark Zandi was on the Obama team. Is he impartial? If the new administration can run this ‘like a business’ maybe the dire predictions can be mitigated.
Seems like today’s Trump economic predictions are the same as those made for the Reagan policies. Back then, economists were mostly wrong because growth far exceeded the forecasts. Higher growth yielded higher tax revenues which mitigated the deficits. There was a lot of deficit spending which Reagan allowed in exchange for higher defense spending and as a compromise to the vociferous Democraps and their entrenched social spending. One thing is for sure, the current tax and spend, high social welfare, onerous regulation, energy project (especially coal, but also oil) stifling policy is killing the U.S. economy with 2% or less growth.
Thank you for your periodic updates. I’ve been reading Weiss Research for many years, along with a lot of other economic, financial, and geo-political counsel. But you are one of less-than-a-handful of advisors that I have tremendous confidence in, and I always appreciate your updates and reporting.
What do you have on The Internet of Things.ja
keep avoiding long-term bonds. Treasuries. Munis. Emerging market bonds. Mortgage bonds
well if local governments and the congress and politicians did not deficit spend , they would not need to borrow !
unfortunately they already have , and even if they balance their present budgets , they stile owe for past stupidities .
Hi Mike: Your column is one of the more astute that I read – very much appreciated. Thank you. For the last couple of months, in your afternoon musings, you have failed to include the change in yield on the 10 year bonds. As I believe this to be one of the more important indicators I am wondering at your reason(s) for not so doing, and would ask that you consider reinstating it.
Regards,
dvd
You neglected the income tax revenue from all the people who will be put to work.
And so, your point about trillions in debt proposed by Trump is…?
Obama doubled the U.S. debt in 8 years and Americans have nothing to show for it except debt…! A big fat zero…!
Nothing , absolutely nothing…
Obama was a visionary and chief divider and demolisher of everything that was good about America and Americans…!
Trump is also a visionary except he has a proven track record of building BIG things and also did an unbelievable job of UNITING a diverse group of Americans to pull the largest political upset in history.
Trump will likely eventually totally destroy the Federal reserve even if he needs to create his own currency…!
Trump = HOPE and harmony
Obama equaled despair and division…!
The market will soar to new heights in the next couple of years when it becomes apparent America is heading in the right direction with a leader not a demolisher…!
so, are we seeing the beginning stages of the “great rotation” out of bonds and into stocks? this could go one for years and years, i’ll bet. imagine that.
Mike: These proposed spending increases, which I do not agree with, need to be offset by a reduction in Federal spending. If we implemented all 2000 plus recommendations that the Grace commission made during the Reagan administration, we could sve 450 billion dollars over a five year period. We can rest assure that there will be a big fight over the death ceiling in March. Regards, Robert Calabro.
What makes analysts think Trump is elected when the Electoral College has yet to vote ? Just asking ! Evil Hillary is not out yet.
So, Mike, is it as simple as long-dated puts on the TBT? Or, is there perhaps another leveraged vehicle, like short REITS?
Mike, everything you have warned about is happening and it’s coming. The amazing thing is, the crash you predicted in Spring this year that would occur in “a few weeks” or months”. … has not happened. In fact the opposite has happened and probably will happen. Here is a couple things I see and would love answers to:
1. The VIX is acting nuts since Brexit. It gets worse every week! Each time the market sells off, it’s bought back in Spades, as if planned. The only way the vix can do what it’s doing is if the entire futures market is being bought up, farther and farther out canceelling out fear trade. It seems the only way this market goes down now is Black Swans!
2. Bonds selling off , yes, big numbers, I suspect as they do, they go into STOCKS as I point out above! How long before the crash, now? I would love further technical info on these facts!
What is the infrastructure spending is privately funded? What if we do not have deficits based on trade deficit reversal? The Dollar will skyrocket especially against our biggest trade partners. Oh wait that is exactly what is happening.
I’m 68 and I’ve seen a lot in my life. In my experience, when interest rates rise real estate goes up. People buy houses “before the interest rates go higher”. It turns into panic-buying and before you know it you end up with a real estate boom.
Looking at the list of recommendations in the last SMR, I note that there were 12 losers, vs. 5 gainers, though Mike claims a slight percentage gain overall. Maybe just a little bit too conservative, hmm?
ARE THE BDC’S SUCH AS MAIN, TMTC, ARCC, ETC GOING TO BE IN DANGER WITH
RISING INTEREST RATES AND COMMERCIAL PROP BUBBLE YOU SPEAK OF?
GERALD
The FED is being forced to raise rates to match FED interest rates with the market. Trump’s expansionist policies will create demand and inflation will be off to the races.Ordinary Americans will bear the brunt with emerging chaos and dangerous times.
U.S. treasuries are rated AAA……ITALY , SPAIN ….are rated BAA & BBB they trade richer so why use Treasuries to value quality companies like Msft…JNJ…GE…APPL..I would be buying quality bonds single A or better for income as rates rise what you will see is contraction of spreads and eventually you will see the AAA and AA corporate bonds trade richer than TREASURIES . My advice to retirees is to buy individual quality bonds ladder them out 10 yr to 30 yrs say 30 % of your portfolio you still will get paid off at par at maturity.
So is it time to buy TBF? (the inverse bond ETF)
Remember that Trump is a real estate mogul. The last thing he wants to see is real estate going down the tubes. He could lose $Billions. He will do whatever it takes to support his wealth, even if he has to put it in a trust fund while he is in office. Do you really want to bet against him?
By the way, since infrastructure supports real estate. that should be a good call by Mike!!
there is one little matter on the books. the crossing of the bering strait by a super highway and rail line to connect trade from russia and to the americas. the trump/putin handshake is a foregone conclusion. this is the biggest threat to the eiites ever. bill mckinlay (1901?) and tsar nicholas 2nd (1917) were assassinated because of this very idea. and so the panama canal went through as planned by the british as they ruled the waves. the very thought of a rail link was anathema to them. and the u.s.a, being very friendly with the brits. they were all for the canal. so lets see how things pan out now. will trump finish like mckinlay and nic.2nd? or will the revolution continue. france, holland, italy and spain are already trumping along and bulgaria and moldova have both elected pro trump presidents and have extended the hand of friendship to russia. poroshenko(jewish puppet) is in the toilet every day fearing expulsion from the ukraine.
americans everywhere should welcome a withdrawal of their military to home base to secure their country, not run all over the planet looking for a fight.(george washington).
we in the land of oz are not generally aware of such matters, being brainwashed by the m.s.m. . but there are ‘green shoots’ (remember them?) sprouting all over oz. so the battle lines have been drawn. trump has won the first battle now for the second. the war is still on..
The Fed can’t raise short rates beyond about 1/2% without shrinking its balance sheet. When they start talking about the balance sheet, then you’ll know monetary policy will normalize. Until then, it’s largely a political credibility game.
I remember reading my first “Bloody Wednesday” article a few years ago. Scared me quite a bit – but not enough to do anything drastic. Thank goodness I didn’t, as the major doomsday predictions you made didn’t even come close to coming true! Interest rates have gone up before and it’s not ended the world yet – enough with the scare tactics!!
Yes Mike , What about those predictions of doom you have made for the last couple of years? It is now being said the market will soon go to 30 or 35 and then crash 20,000 and stay down for years. Advice?
Nice article Mike but I would like to know whens the next boom coming or has all the hard work done in the recovery of the economy in the bull run in the stock market for the last 8 years gonna go to waste. Even Mutual Funds have to pay out dividends to shareholders eventually or otherwise an EGM will be called.