The American (Debt) Jubilee, And The Current Correction
- The debt and income Jubilee.
- Interest rates - what has worked.
- Sector leaders - what is working.
- Market corrections and inflection points.
According to ancient Scriptures, the Jubilee is the pinnacle of restoration for those that had land and lost it. For those that have either fallen by misfortune or by their own choices, the land would be restored to them or their family line every 50th year. The Jubilee is culmination of seven 7-year periods, each of these periods offering the promise of freedom to bondservants and a year of rest in their land which is known as the Shemitah. The Jubilee is a time of great celebration across the land, because the Land that was lost was to be restored to the proper lineage of those who lost it. So every 7 years, slaves were freed and every 50 years, families that lost their land would get it back.
The land was lost for many reasons, including the inability to pay debts, negligent behavior, unforeseen misfortune, or many other possibilities, not unlike issues we currently face in the present. Author Jonathan Cahn, in his book titled “The Harbinger,” provided a wealth of valuable information regarding the history of Wall Street, the financial markets eerie relationship with the Hebrew calendar, and the 7-year cycle leading up to the Shemitah. Although this is not the focus today, it is worth reading, regardless of whether you believe in chance or some greater design. Before you dismiss this, as I almost did, the crash of 1987, the 2008 housing crisis, and 911 all occurred precisely at the beginning of these Shemitahs. Now let’s move on to how this affects us today and how markets are also affected by both long and short term cycles.
Inflection points are always interesting to observe. Some refuse to see the changes that are slowly making themselves known; they ignore the handwriting on the wall and sometimes suffer the fate of the frog that perished in boiling water. Others presumptively move in too quickly, in anticipation of what they believe will occur and often find they have made an equally volatile choice, possibly even a worse choice than had they waited just a little longer. A great short story, by Spencer Johnson, titled “Who Moved My Cheese” crystalizes this very concept. When the veritable cheese that mice and men have become accustomed to is no longer delivered as expected, the little men become paralyzed by their own minds, lamenting why the cheese isn’t there and remain bewildered by the lack of cheese. The small minded mice realize that there is no cheese and run off to find more. In Short, the book describes a number of valuable concepts:
- Change happens - The cheese keeps moving and we should continue to seek it.
- Anticipate change – Get ready for the cheese to move.
- Monitor change – Smell the cheese often so you know it’s getting old
- Adapt to change quickly – The quicker you let go of the old cheese, the sooner you can enjoy the new cheese
- Change – Move with the cheese, not before or too long after.
- Enjoy the change – Savor the adventure
- Be ready to quickly change, again and again – The cheese keeps moving and we should continue to seek it.
These apply very well to life in general and to success in the financial markets.
Before I completely derail myself from the main topic, which is really about interest rates, let’s look at one more author, Porter Stansberry from Stansberry Research, who published the book “The American Jubilee.” I have not read the book and cannot comment on all that is said in the book, however, based on the website listed above, I believe he has stumbled on to something very important, namely the Jubilee. A process that takes far longer than what many individuals observe, full cycle throughout their adult lifetime. In his book, he charts the ebbs and flows of income inequality and among many other things, he suggests that the income share of the top 10% of wage earners was as follows:
- Pre 1920 to 1940 - Above 40% and peaking at nearly 50% for much of that period
- 1930 to 1980 – Declining to below 35% for the majority of that period (~50 years)
- 1980 to current – beginning to rise above 40% and peaking above 50% a number of times
According to the World Bank data, the Income share held by highest 10% in the United States is as follows:
- 1979 - 25.3%
- 1986 – 26.8%
- 1991 – 27.6%
- 1994 – 29.7%
- 1997 – 30.5%
- 2000 – 30.4%
- 2004 – 30.3%
- 2007 – 30.5%
- 2010 – 29.4%
- 2013 – 30.2%
Regardless of which data is more accurate, the common theme is that those who have more are continuing to do so. The above figures are far higher in many nations, especially those in South and Central America, Africa, and many in Asia and South East Asia. Conversely, they fall between the mid to lower 20 percent range in many developed European nations.
We can see similar lengths in the cycles of interest rates and the disproportionate income shares described by Stansberry research. Long term rates peaked in the 1920s and dropped for over 25 years before bottoming in the mid 1940s. From that point, rates began to rise and overtook the 1920s high in the 1970s (50 years later). Rates continued rising until reaching nosebleed levels in 1981, an inflection point that few will forget, and have gradually fallen until the most recent low in 2016 (almost 50 years later). If there is truly a cycle here, there may actually be another test of the interest rate lows, however some bottoms occur in a V shape and others resemble more of a W.
Time for a little math – The real value of money and debt.
When presenting financial seminars in Bradenton, FL I would often ask the question “how many of you have paid more for you most recent car than your first house?” The response was overwhelming because, in that small crowd of seasoned investors almost all answered yes. Pragmatically speaking, if you have a $100,000 mortgage and inflation is at 3% the real value of that mortgage in today’s dollars and excluding mortgage payments, let’s say in 21 years, will be $52,748.05. Conversely, if you owned a $100,000 bond, under the same 3% inflation assumption, your bond will only be worth $52,748.05 in today’s dollars, excluding interest you received over the years. In short, inflation and rising interest are somewhat of a debt Jubilee for those that have not and assuming wages keep up with inflation. They are also somewhat of a rebalancing of wealth from those whom have lent money (aka bond owners). This same inflationary concept can theoretically fix a lot of debt problems, including on a national level. For those who have debt, whether an individual, a corporation, or even a government, it may make sense to begin locking as much of it as possible into longer term while rates are low. For those that own debt, it may make sense to weigh the cost of principal security vs. the inflationary risk.
Now whether there really is going to be an American Debt Jubilee or not, we can ascertain one thing. That certain forces drive prices, rates, and even the stock market higher and lower over time. Upon careful observation, one can deduce that these things can remain out of balance for very long periods, as we have seen with US interest rates or even the secular bull and bear markets. Eventually however, and sometimes swiftly, they return to the mean levels, valuations, and prices.
Sector leaders – what is working
Basic Materials (XLB), Industrials (XLI), Consumer Discretionary (XLY), Health Care (XLV), Financials (XLF), and Technology (XLK)
By market cap
Small Cap (SLY), Mid Cap (MDY)
Growth vs. value
Growth (SPYG) is in
Emerging markets (EEM), Chile (ECH)
What has worked in Rising Rate environments – Frugal bond holdings, high yield and convertible bonds, preferred securities, basic materials, energy, industrials, technology, financials, growth stocks, and Home Builders.
As discussed in the last letter, there appeared to be two possible outcomes for the market. One possibility was a move to new highs, indicative of a healthy market. The other was a move down and consequently testing the February lows. It appears we are heading towards the latter outcome. We will be watching diligently for one of two possibilities.
- The market tests the low, slightly above or below and bounces quickly and energetically (within days not weeks) which is a positive sign moving forward.
- The market fails to hold the February lows, which may be indicative of lower prices.
Please heed the wise words of Jeffrey Saut, Chief Investment Strategist over at Raymond James who says “Never on a Friday.” According to him, markets rarely ever bottom on a Friday, so don’t go fishing for lows just yet, especially on a Friday.
The very nature of our economy vacillates between periods of excesses and shortcomings. Wage inequality and interest rates seem to be unsustainable at current levels, and as they have in the past, will likely return and possibly even surpass the historical median towards the other extreme. Rates generally tend to move gradually, but in spurts. It took 40 years for rates to move from the 1940s lows to the 1981 highs, so don’t get to excited too quickly. The market is a fascinating place where many valuable lessons can be learned, like learning from your mistakes and the mistakes of others throughout history. Don’t assume change before change occurs, but be vigilant for when it does. Follow the leaders and remain with them as long as they remain on course. And most importantly, be humble enough to know when you are wrong and do something about it.
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