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One side argues we’re heading into a recession. The other argues the economy is heating back up.
One side says gold prices are about to explode above key resistance. The other side argues we’re due for a severe correction (at least).
One camp says interest rates are about to plumb unimaginable depths, while the other believes they’ll soar from artificially depressed levels.
As for stocks? Some argue they’re the buy of a lifetime now that the averages have broken out. Others point to how they’re massively overvalued, and at risk of a serious plunge.
I’ll be honest. I can’t remember seeing such a wild split in views on so many different markets. Part of the problem seems to be that policymakers themselves can’t seem to agree on what the heck they should do.
San Francisco Federal Reserve President John Williams released a paper yesterday that indirectly made the case for “lower for longer” interest rates. It also made the case that “conventional monetary policy has less room to stimulate the economy during an economic downturn.”
That was very similar to comments from other Fed officials, who have increasingly been embracing the idea of secular stagnation for the U.S. economy. So the dollar tanked, gold soared, and interest rates fell overnight.
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| Policymakers themselves can’t seem to agree on what the heck they should do. |
But then a bit later this morning, New York Fed President Bill Dudley sounded a hawkish note in comments on the Fox Business Network. He said the Fed could hike rates as soon as the September 20-21 meeting, and that the markets were too “complacent” about potential moves. That caused the dollar to rally from its lows, gold to reverse early gains, and interest rates to rise.
What seems abundantly clear to me is that we’re at a crossroads. The biggest “Everything Bubble” in history, coupled with key turns in the credit and economic cycle, suggest that caution is still the best investment stance. But many mainstream analysts and Wall Street types want to embrace a new narrative, one of massive fiscal stimulus, a resurgent economy, and a wholesale rotation into much-riskier stocks.
| “Caution is still the best investment stance.” |
That excludes some of the world’s wealthiest investors and more-maverick fund managers, of course. In fact, billionaire investor George Soros doubled his sizable option-based bet against the S&P 500 in the second quarter.
You should know which way I believe this whole mess gets sorted out, based on everything I’ve written here in Money and Markets … shared with subscribers of my Safe Money Report … or told investors face-to-face at recent conference appearances.
I also just conducted a timely, hard-hitting online briefing called: “Cracking the ‘T’ Code: The little-known chart pattern that could make you 5 times richer in 12 months or less.” I hope you took some time out to see how you can use these markets to go for gains of 234% … 270% … and up to 412% in as little as 14 days. I also provided my outlook and forecasts for the rest of 2016 and 2017 – and explained how you can keep your wealth intact AND growing, in today’s crazy and chaotic world.
If you didn’t get a chance to join me, the briefing will be available for a limited time online. Just clink on this link.
Meanwhile, I’d love to hear your thoughts on the recent volatility across several asset classes. Where do you think bonds, stocks, currencies, and gold are headed? Why? The comment section is your place to sound off.
Until next time,
Mike
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As I alluded to earlier, if you’ve been reading or watching my commentary, or if you’ve had the chance to see me in person at various conferences over the past few months, you know I’ve been relatively cautious on the markets. But in yesterday’s column, I did mention a few select areas where you could potentially rack up gains even in a higher-risk environment. So what did you think about them?
Reader Anthony G. responded by highlighting one of the market’s biggest obstacles: “The masses are suffering from income famine. This central bank con game bubble will soon fade.”
Reader Justin also sounded a skeptical note: “It’s too soon to say conclusively, but each day we’re getting closer to an August Top/October Crash scenario. Now is not the time to establish new long positions! Now is the time to take profits!
“In the months ahead, either sit on your thumbs, or if you’re agile and can time the market, there are any number of 3X ETFs available. And, gold has started to act as a flight-to-safety vehicle lately. So after the major indexes make a top, if gold makes a decent correction in the coming weeks, there could be an opportunity to go long in the yellow metal.”
Reader Root took a more philosophical approach, saying: “Is a ‘good’ market an up market? Is a ‘bad’ market a down market? Nature works best when that pendulum brings activities back to balance. Just because we tend to think things are best if increasing in price, in size, in energy, etc. … really? I’m glad my children didn’t keep on growing larger after they hit 21!”
Finally, Reader Geoff B. highlighted many of the problems Japan is facing – and why even more aggressive stimulus is likely to fail. His take:
“In Japan – with an aging population, shrinking labor pool, xenophobic approach to immigration, lack of innovation, lack of pricing power, and no growth in productivity – how can you ever attain economic growth? These are fundamental structural problems that government spending cannot overcome.”
Hmm, some of those problems in Japan sound awfully similar to those we face in the U.S. Maybe that’s why the Federal Reserve keeps backing off plans to raise interest rates, and why we can’t seem to get real liftoff in the U.S. economy.
As for the broader markets, it’s all about growth here. If the bounce in the economy we saw in June and July peters out, I don’t see how stocks can keep soaring – particularly stocks that need strong GDP growth to generate healthy earnings growth.
That’s my view anyway. If you haven’t shared yours yet, take some time to do so in the comment section below.
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The U.S. industrial gas supply company Praxair (PX) is considering buying German rival Linde (LNEGY). Pricing couldn’t be learned, and there’s no guarantee a transaction will result from the talks. But the combined company could have a market capitalization of more than $60 billion.
Germany’s Volkswagen AG may face criminal charges and/or a large settlement with the U.S. government. The Justice Department reportedly found evidence of criminal behavior related to emissions-test rigging, meaning criminal fines above and beyond existing civil penalties are likely forthcoming.
Don’t look now, but rates are rising – if you know where to look. Specifically, rates on short-term corporate loans are climbing. So is the so-called LIBOR-OIS spread, a measure of the difference between short-term corporate rates and short-term, risk-free rates.
When these rates and spreads began increasing back in 2006-2008, it was an early warning sign of broader credit stress. Stocks later collapsed. Most analysts say today’s rise stems from a more benign cause: New regulations. They’re driving money market funds that previously would buy short-term corporate paper into government securities instead.
Keep an eye on this trend, though. If it continues well into the fall, it may be a sign of something more sinister lurking.
So what do you think? Are indicators like the LIBOR-OIS spread an early warning sign (again)? Or just something to talk about in a slow August market? Any thoughts on the latest, large trans-Atlantic merger? Or Volkswagen’s ongoing emissions problems? Hit up the comment section and share your views when you have a minute.
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.
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An investor is a fool, if he/she buys bonds that pay hardly any interest, or even cost money to hold (negative interest). A bond is a bit like an auto, which loses value when you drive it out the door. If you need to sell it before maturity, it sells for less than face value, but at least it should pay interest while you hold it, and be redeemed for face value at maturity. If it doesn’t pay a reasonable interest, greater than the rate of inflation, it is not worth buying, and should have no market. Government bonds may have some element of safety, but if they cost you money to hold them, they are not worth buying. Don’t!
Indeed, it makes no sense to buy a bond that gives zero or less interest, when cash gives zero or better interest, and has lower transaction costs to boot.
Anybody that thinks the democratically influenced Fed will raise rates before the election isn’t paying very close attention.
The one huge advantage that individual investors have over institutional investors is that we don’t have to be in the financial markets. When there are no good investments, we don’t have to invest.
The old rule of successful investing is to buy low and sell high. New market highs are no time to establish new positions. When everything is high, it’s time to start averaging out of your investments, and try to sell everything before the top. Eventually, if the bubble goes on long enough, you will wind up 100% in cash. If you are not an institutional investor, you can sit in cash until you see a good opportunity. That opportunity may not be in the financial markets, but if you aren’t an institutional investor, that’s OK.
I mean seriously gentlemen? 69 yrs old, success early on in NCR carrer, traded when dow was 900, bought, sold gold, sliver both at scrap, and gathered few numismatics late 70;s, easry 80’s. Owned operated stripper oil wells, started pipeline and nuclear plan supply house. Articles to validate statement, business sections of decent size city 1977. Paricipated in Swill annuitie brokerage, prescioius metal news letter operation while in Santa fe New Mexico.
Been there done that for real. Read, see, hear as physical and mental well being has stayed with me ove the years. Actually not surprised that so many are on both sides of so much, have to have it make markets. Buyers, Sellers that what it takes along with so many so called experts to create interest for the “iinvestors’.
Reality; which is all that matters, some will be right, some wrong. Do not understand when there is literal simplicity, get in cash flow hard assets, not labor, management intensive real estate unless you yourself are in charge of same, hold some prescioius metals in your hands. Enjoy the ride, do not listen to all the so called consultants, money managers, letter writers. Get in touch with someone you can see, talk to on regular basis every month or two and get monthly net checks with 5-10% annual return along with depreciation against your direct equity ownership at the courthouse. Remember the bigger the book, the wordier the phrases, the slicker the cover the more front end load.
Simplicity! Results not sophisticated education just results.
Answer man
Yuan inclusion by IMF in the the fall will affect the Euro more than the dollar and higher rates in the coming months will further ensure that is the case. Therefore, I predict Fed will raise rates to attract more capital from Japan and Europe flowing into US bonds, banks, equities and increase demand for the dollar.
Right now the dollar is roughly 42% of the IMF SDR basket and the Euro is 37% while Yen is 9% and Sterling is 8%. The fed wants to engineer an 11% spot for the Yuan that does not change the dollar SDR share. The Fed will raise rates to ensure the Yuan SDR share comes from Euro, Yen, and Sterling. NIRP and Brexit have definitely helped but the pound and Euro falloff has stabilized. A rate push will be needed in the fall.
Stocks, bonds, the dollar, gold, etc., are swinging wildly and irrationally because
(1) investors don’t know whom to believe–the propaganda from the power elite who think they are exerting control via said propaganda, or what investors observe locally;
(2) investors are hearing experts (who are doing their best but are also hearing the same propaganda) proposing completely conflicting opinions;
(3) investors are wandering around in a financial situation that is beyond the pale in terms of anything that has been before–insurmountable mountains of sovereign and personal debt, negative interest rates, stock prices going up in spite of lousy company fundamentals, multiple large economies in trouble, and too-big-to-fail banks that are larger and are still making stupid (criminal?) decisions because they did not have to pay a price the last time they did so; and
(4), last but not least, many folks just assume that “someone” will fix the crash once it occurs (like last time) and everything will be just fine.
I think that many investors are just “reacting” as best they can to the Alice-in-Wonderland scenario playing out globally. And I don’t think that most of them truly believe the possible/probably disaster that lies ahead.
You are correct…extreme caution and preparedness are the only sane approaches.
I am to your and impressed by the depth of the major financial movements. There is an
important Event on the. On September 4 “IMF” will declare their Official decision to make
Yuan an International Currency. Yuan will become about 10% of bucket very few International
Currencies that the backbone of “SDR”. Jim Rickard, author of “Currency Wars” says it will be beginning the death of Dollar and it’s implications will be severe and widespread. I will
appreciate your comments,as several Asian countries are already using Yuan and USA markets are over heated by massive Capital shift from unstable Europe to United States.
Sincerely, Nazir
I am new to your Advisory programs and very deficient in typing.
thanks, Nazir
i
I say get out while you can don’t be greedy get some PMs cash food get your money out of the banks it’s not earning enough for the risk. Don’t forget the ammo/ coffee / tolite paper
I doubt that they can raise the rates without causing shock waves throughout the whole economic system !
Another Black Swan entered the Economic Pond as Freddie and Fannie are once again under economic Stress to the tune of $120 Billion Dollars .
I like your biggest “everything bubble” term, Mike — describes perfectly what’s going on. As for projections, we won’t really know about the immediate short term until we get the Fed minutes tomorrow afternoon. Longer term, my crystal ball projects by year end: 10-yr. yield: 0.75%; Dow: 10500; Gold: 1675; US$: 88. But I always defer to Mr. Market. We’ll see what happens.
When the government borrows, the loan increases our deficit. When the borrowed money is spent it is counted as growth reflected as GNP. Government can increase GNP simply by borrowing and spending more. For those that see growth from increasing debt, good luck.
I doubt that interest rates will rise as government won’t want to increase the cost of servicing this faux growth.
A few months I followed your recommendation to buy SEF. Did I miss a suggestion to sell? It has clearly been on the wrong side of the trend. Do you still advise to hold as a hedge?
What annoys me with all these forecasts and predictions is none of them bear any relation to MONEY ,No one has been using money as a means of exchange since the early 1900’s , Bretton Woods in 1934 pegged the dollar at $35 /oz and all the worlds CURRENCIES ,which is what I call them, were pegged to that. From that time onward, the whole FIAT CURRENCY (paper) system has been an elaborate FIX ,before ,when MONEY could be exchanged for Gold or Silver no government could spend more than it held in their reserves ,and the paper (fiat) had the equivalent value .Now they just start the printing presses and the more they print the less the currencies are worth –SO WHERE TO NOW??
Which of the Ruling Class is rigging the LIBOR rates this week ?
I have been investing in the market for 50+ years. I have never seen the world financial picture as convoluted as it is today. I think most people will agree that the 2008 meltdown was a large part of what is happening today. Overall, Bernanke did a good job to keep the financial world from a complete collapse. However the Stimulus package never went to main street. Then Zero interest rates for the past 8 years.Nobody on main street was making any headway to invigorate the economy. Now, the market is at an all time, riding the wave of cheap money. Add to that, negative interest rates in Europe. Where are the Europeans going to get some return on their money. (America of course). So now all markets are over inflated.
There’s a big storm brewing, However no one knows when it will blow the house down. All you can do is sit on your nest egg and wait for better times. Good Luck
The long hot summer of complacency is making fund managers crazy and rich. It’s Friday, let’s throw a fistful of cash into [our favorite stock] so we can brag to our bar buddies about our latest sure thing. Next Friday, yank it all out so we can brag about our outrageous commission profits. We don’t care about their wins or losses, we always win. This is the price mom and pop pay for mediocrity.
When I hold my middle finger to the summer breeze, it’s blowing to the south and will become a hurricane.
“Most analysts say today’s rise stems from a more benign cause: New regulations.”
Who’s paying them to talk?
I sure wish these Fed speak rubber necks would speak from the same hymn page. This John Williams fella sure sings a different tune than Looney Lockart who well speaks more like a praising Chinese economist. Stay the course things are better than the data reveals blah blah blah. Do this idiots really think we are all stupid out here. Look at todays news offerings Cisco is going to show 14,000 workers the door clean out your desk your gone. BHP Bilton is having the worst business year since their inception in 1851. Another greedy corporation loaded to the hilt with debt and suddenly runs into a streak of bad luck breaking dams, commodity price crash. As the bible states there shall be 7 fat years and 7 lean years well guess which cycle is approaching. But analysts with their tinfoil hats on came in at below the company’s actual loss (the norm now for companies to make themselves look good) and tried to soften the blow as did the companies CEO (the little bit he does to justify his fat salary while the company sinks into quicksand) CEO speak. Well there you go investors buy this company based on the CEO’S “confidence” What a joke. Oil and copper futures do not look good so what the heck is this turkey talking about.
“While commodity prices are expected to remain low and volatile in the short to medium term, we are confident in the long-term outlook for our commodities, particularly oil and copper,” Chief Executive Andrew Mackenzie said in a statement.
Even excluding $7.7 billion in write downs and charges, underlying profit slumped 81 percent to $1.2 billion for the year to June 2016 from $6.4 billion a year ago, hit by weak iron ore, copper, coal, oil and gas prices. The underlying profit was better than analysts’ expectations of around $1.1 billion.
Looks like the “Dud”ley is joining the other two Pillsbury dough boys John Williams and Lockart in rattling the interest rate increase sabre as well. They are shamefully influencing the markets. I hope the next president sends Yellen and her whole crew packing what a shameless bunch.
There is one part of the economy that is never mentioned and I receive a lot of letters from different advisers . Older or retired people who just want good safe interest rates from their bank . Tell us how many of this type of investor live in the states . I live in Australia and have invested today money at 3.2% which is available at call and guaranteed up to $250,000-00 by the Australian Government . I also have silver and gold as a backup .
One person says “There is no money”, another says “interest rates cannot be maintained at this or negative rates”. Yet another says interest rates cannot go up, because it would cause the govt. to fail.
Gentlemen: in my humble world view all of the above is TRUE. The international money market Leaders have lead us poor folk to the brink of extinction. There are no future alternatives. Again in my humble world view, all that remains is the IMF to step in with SDRs, and tell us what assets count, and for how much they count. The operative word for financial markets, terminal.
I guess if Hillary were CEO of VW, rigged emission tests would not make
“any difference” to the justice department.
I have never been a fan of Mr. Gartner and his newsletter but he does hit the nail on the head making the following statement.
. My own humble opinion is that they are deliberately doing this. Rather than raise rates which they can’t they are trying to directionalize the market with Fed speak. Gartman states that the Fed is doing the market a disservice .The officials in question might think that by airing their different opinions they are doing the market a service by making their policy decisions less and less opaque and more and more transparent. They are not, however! They are creating confusion rather than transparency,†he said. unquote. Finally the truth.
Hi…If you look at any chart of a collapse, you will see an exponential spike followed by a sharp drop, we haven’t had that yet, so, unless the present chart is going to break with convention, we still have a spike to come, Possibly a ‘white swan’…. the smart ‘galactic money’ is gradually exiting markets, like hundreds of tankers trying to turn at the same time, leaving the bright eyed bushy tailed investor to buy the bargains….and lose his or her shirt, talking of shirts, when it does come, there will be numerous rallies and even sharper contractions, in 1929/30 there was 7 such rallies and contractions. .I only trade FX bye the way…. take care.
In 1925, England adopted the Gold Bullion Standard, where the currency was only convertible into gold in large quantities. Other countries adopted a Gold Exchange Standard, where instead of holding gold (which earned no interest), they held sterling which was convertible into Gold, Gold will always be the wisest and safest investment due to its scarcity.