I’ve made no secret of my bias toward credit-market indicators. Again and again, I’ve pointed out that you can learn a lot as a stock investor by following what’s going on in bonds. And right now, the behind-the-scenes credit squeezes I’ve been highlighting are only getting worse.
Market Roundup
Take the yield curve. I pointed out last December how the benchmark spread between yields on 2-year Treasuries and 10-year Treasuries spent most of 2015 contracting.
That trend has shown no sign of letting up in 2016, and in fact, the spread is now flirting with its lowest level in almost nine years. Other key spreads, such as the difference between yields on 2s and 30s or 5s and 30s, are also collapsing.
How about three-month LIBOR, the key benchmark for corporate borrowing costs? It just hit 83 basis points, a fresh high going all the way back to 2009.
I pay attention to moves like these for a very important reason … actually 300 trillion of them. That’s the estimated amount (in dollars) of global debt, derivatives, and other securities whose valuation or whose interest rates fluctuate with various LIBOR benchmarks.
Heck, if you have an adjustable-rate mortgage (ARM), your own interest rate and payment may very well be tied to LIBOR. That means these LIBOR increases are going to hit you in your wallet as soon as you hit your next adjustment date. The 1-year LIBOR benchmark rate used for many U.S. ARMs has almost tripled to 1.54% today from a low of 53 basis points two years ago.
The stock market breakout in July got a lot of coverage in the mainstream press. But major averages like the Dow Industrials and S&P 500 have basically gone nowhere since then. I don’t know if that’s going to change. No one does. But I believe the signals emanating from the credit market are a growing problem, and I’m not alone.
A Wells Fargo economist’s note from a few days ago answered the question “Where are we in the credit cycle?” by saying “late.” A separate analysis from Cumberland Advisors concluded much the same thing, warning that the rise in LIBOR isn’t just a side effect of new fund regulations. And of course, I told you earlier this month that banks are tightening the screws on many borrowers – something we haven’t seen since the last major credit cycle turn in the mid-2000s.
So keep that in mind when you’re deciding how much money to commit to stock market investments. And if you want to know more about this incredibly important topic, don’t just follow my commentaries here in Money and Markets. Join me in person to hear much more at the following two conferences:
- The MoneyShow Toronto, September 16-17: You can register online by clicking here. Or just call 800-970-4355 and mention priority code “041484.”
- The New Orleans Investment Conference, October 26-29: Online registration and more details can be found by clicking here. Or call my staff at 800-648-8411, and mention Money and Markets and/or Safe Money Report.
Lastly, don’t forget to weigh in on the potential message coming from the credit markets in our comment section here at the website.
Until next time,
Mike Larson
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Will they or won’t they? It seems like we’ve been asking and trying to answer that question with regard to Fed interest-rate hikes forever. But given the fact the Fed is in the news again, the topic needed addressing again yesterday.
In response, Reader Tom said: “All the talk about interest-rate hikes, in my opinion, is really nonsense. The only person who you should pay attention to is the Fed Chairman herself, and I think her answer to a rate hike is ‘NO’.”
Reader Kishin M. said: “It is obvious that the Fed has been procrastinating about the hike so that the markets don’t freak out again as they did after the first hike. Since then, the U.S. economy has been playing hide-and-seek with unemployment and inflation reports not being steady enough over any two consecutive months.
“If the unemployment report due this week is not good enough again, the Fed will again have an excuse for not hiking in September. The underlying factor is that the Fed wants to keep the markets high to give the impression to the world that the Fed and other central bank heads in the developed world are doing their duty to improve the global economy.”
Reader Nels added: “There are ‘Too Big To Fail’ organizations like the insurance companies and pension funds that will be destroyed if interest rates stay low. There are ‘TBTF’ organizations like federal, state and local governments, and many large companies, which will be destroyed if rates rise. Whatever the Fed does, it will end badly.”
Finally, Reader Thomas said: “Let us cut to the bottom of the Fed. What is their core function? What is their mandate? Certainly not to interfere with the free market movements, and certainly not to cause markets to spike and contract in volatility based on declarations and rumors. It is their job to create STABILITY, NOT volatility!
“Let us give them a rating on their performance, similar to any other institution. On their mission statement and on how successful they implement it, I must give them JUNK status! In fact, the sooner they are liquidated, the better the economy will do on all fronts.”
I appreciate the input. I think it’s pretty obvious by this point that the Fed has done a terrible job forecasting the economy over the past several years. They have also repeatedly helped create, then failed to rein in, massive speculative bubbles in multiple asset classes since the late 1990s.
So frankly, I have no confidence they’ll get us through this “Everything Bubble” without significant market volatility. That’s one reason why I remain fairly conservative in my investment outlook and positioning. But I’d love to hear your opinion on that in the comment section.
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The European Commission handed down a landmark judgment of up to €13 billion ($14.5 billion) against U.S. tech giant Apple (AAPL) for evading years of taxes on its European profits. The EC determined Apple used a “head office” established in Ireland to dramatically reduce its tax burden over a period of several years. The penalty represents actual taxes owed, plus interest, though the exact amount Apple owes won’t be known until a lengthy appeals process plays out.
Federal Reserve Vice Chairman Stanley Fischer reiterated his recent message that the job market is “very close to full employment” in a Bloomberg interview. Those kinds of comments suggest this Friday’s jobs report is particularly important. If the U.S. economy added 180,000 or more jobs in August, as economists expect, the Fed could raise interest rates in September. But the bond market is still reluctant to fully embrace that thesis given how many times investors have been fooled by the Fed.
Food giant Mondelez International Inc. (MDLZ) abandoned its attempt to purchase Hershey Co. (HSY) after the candy maker rejected its latest offer of around $115 per share. That was up from an initial price of around $107, but below the $125 that Hershey reportedly was demanding.
Hershey has a complex corporate ownership structure, making it unlikely that anyone else will step in until certain changes are made in the next year or two. That’s leading to speculation MDLZ may make a play for another food company to boost sales and earnings growth.
What do you think of Europe’s efforts to get a significant pound of flesh from Apple? How about the Fed’s newfound hawkishness – will it actually result in a hike? Any thoughts about the Mondelez bid, and whether or not the company will have to pursue someone else now that Hershey is out of play? Share your comments below when you get 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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Hi Mike
The GOLD timing debate
While it’s important to look at historical cycle’s, graphs and charts to predict future global economic direction, it’s worth asking are we missing something? What I’m getting at is this. No one would have predicted eight years ago that we would have negative bond yield rates, or that several central banks would follow the Weimar Republics historic debasement of their currency. Or that many types of corporate and government debt would become completely unrepayable, that bank defaults and bail ins would become an increasing possibility. We also need to consider this new policy direction with the associated human responsive behavioral reaction to these changes? These may not show up on any current graph or chart as some of these steps into the unknown seem almost unprecedented. Consider another position for the followers of Harry Dent who believe that gold will fall as low as $650. These assumptions presuppose and believe that the $US is still worth something other than a means of exchange and has not been debased. Ask yourself this, how can the gold price sink to below its mine cost recovery rates or below its all in costs, before gold takes off to the upside?
I agree with you Howard, and would go on to say that this is not a time to speculate unless these points you make can first be determined reliably. With falsified jobs reports, falsified interest rates, falsified exchange rates and a falsified market as a result, how does one determine the truth?
I am not a fan of Harry Dent, and feel that he will lose his bet with Doug Casey regarding movement in the price of gold; seem to recall that it was something like reaching $700 before $1,400. Falsified data trumps demographics data as I see it.
Apple already had a suspension of sales in Beijing. As we go forward, other countries will favor their own home-grown companies more and more, through legislation and court procedures. It will be increasingly difficult for American companies to thrive based on overseas sales. This will be a big challenge for Apple and many other US multinational companies, whose growth will be limited. At the same time, if you choose to invest in Chinese companies the Chinese government might just decide to repatriate all shares, costing you a bundle. It is a risky world.
The job market is close to full employment?? With 90+ million unable to find a job? Who is that idiot kidding?
Themselves
God, I could not agree with you more!
Looking at the labor participation rate now versus 10 years ago there are about 12.6 million more people who would be looking for a job if the economy was actually vibrant. That would make the headline U-3 about 10% and the more descriptive U-6 about 16%. Even at full employment about 33% of working age people aren’t looking for work. You are correct in noting that the Bureau of Lying Statistics is a farce whose only task is to put a smiley face on a pile of dog dung.
Your stance and bias towards credit markers are more than just accurate, it is also a compelling case to closely observe the correlation between stocks and bonds! The 12 month LIBOR graph in your article says it all! Let us extrapolate this correlation during the past 50 years, through every boom and bust period. For those who wish to do this exercise, the rewards will be an eye opener, something you can take to the bank! Let us keep an eye on those Corporations that borrowed at almost a zero rate to engage in stock buy-backs! The Corporate debt ratio against their liquidity to pay back those loans is most alarming to say the least! The only safe remedy left is to focus on currency trades!
Many companies also had to borrow to pay dividends, since they didn’t earn enough to pay from cash in hand, and didn’t want their stocks to tank if the lowered or halted dividends. Some Big Oil companies, and the three consumer companies I mentioned before: Mattel, Kraft-Heinz and Kellogg, for example.
Seems like we have 3-4 months before TSHF –
http://www.zerohedge.com/news/2016-08-30/if-fed-doesnt-restart-qe-yield-curve-inversion-economic-dislocation-imminent
That would be after the election so vote for the liar of your choice and then sell everything.
its kind of stupid to buy 2030 to 2040 US bond – look at the freaks that make up the population and tell me they are going to be able to work in a mentally and physically demanding profession. Only 21 % of todays youth can pass the military mental and physical exams, the remaining 79% are too stupid or disabled to drive a Army Truck or shoot a rifle.
So all the US bonds that people are buying, causing the interest rate into minus levels – are betting on a declining health base, and a declining level of mental cognizance. That’s the good news.
Fitch Ratings says that not only was the sub-prime auto loans 60 day delinquency rate up 13% in July, year over year, but the prime loan delinquency rate was up 21% from 7/2015. Ford still is giving 72 month zero rate loans to get rid of it’s 2016 overstock. It doesn’t look too good for F over the next few years, since these are company issued loans.
Looking at banks’ stocks lately, the rise in interest rates seem to have some traction. I wonder how high the Libor could go above the FED rate.
There is no reason to think that there will not be a double down on the current direction. The illusion of normality must be maintained until after the US election. John
The Fed could raise interest rates in September.
Reasons why the Fed will not raise rates:
1. It is an election year.
2. The To Big To Fail Banks have US Treasury 30x-50x Leveraged Derivatives base on current interest rates. Any rise in rates would cause massive defaults & loses to the banks.
3. The National Debt is increasing 1.5 Trillion a year. Servicing the current Debt of 19 Trillion is huge problem. Just an1% increase would add 190 billion in interest payments.
4. The Fed lies: Do you remember when the Fed was going raise rates when unemployment rate dropped below 6%. October 2014 rates dropped below 6%.
5. The Federal Reserve is a Private Bank and is controlled by the Banks.
5. The Federal Reserve destroying the Dollar & American’s Savings Since 1913
Yes Weston thats pretty well it but my bet is still on the fact that the Fed has over read their data and will go in September. They must flex their financial muscles regardless. After all these jerks couldn’t tell you the price of a loaf of bread within 5 cents. The job numbers will be goosed to look good this Friday and it will be all systems go for a rate blast off. Already the lead up numbers this week are mostly positive slight misses are poo pooed. Consumer spending was up, new house sales were up, consumer confidence was up its all building up to a crescendo on Friday. When you are in charge of the numbers you can make them read whatever you want. All the above so called positive numbers are leading up to “good” job numbers on Friday but not too good that would give away the game. I am thinking 210,000 should do the trick. It will knock down gold which is one of their priorities, boast the dollar (its an ego thingee) the stock market has been massaged to accept an increase but will correct 200 or 300 points in a token gesture and the Fed will pound their chest and say “see we did it”
Gordon
Sounds pretty compelling but the last rate hike last December brought the markets down close to the 10% mark . I wonder if they would take that kind of risk right before the election ??????
The job market is not at full employment, not with the labor participation rate (lpr) at 63.8% When the (lpr) reaches 66%. Then I will agree we have near full employment.
Its really an insane world. All the world stock markets mirror what the American markets have done the day before lock step. Its no longer a judge of what is happening in their home countries what business conditions are its a follow the leader market. The Asian TV channel states that the Asian markets are treading water till Friday to see what the American employment numbers are so they can ride the American coattail up or down. Its no longer about their internal fundamentals.
National debt is just too high for them to raise the rates ! Every 1/4 point will mean 50 Billion more in interest !
The new ISM Manufacturing index, which has been in positive territory – that is, above 50 – for the last 6 months, fell to 49.2, indicating a contraction in manufacturing. Not only that, new orders and backorders fell, along with production figures and manufacturing employment. That is a negative sign for the economy, and may put the kibosh on any rate hike by the Fed, especially if the total employment figures disappoint.
Wow, what I would suggest is for all investment advisors reduce the GNP to agricultural production, mining, and manufacturing, including real estate construction, and compare that inflation adjusted number of the mid sixties. Reality just might arise it’s ugly head.