Few Are Paying Attention... AGAIN
The Fed has changed their language it would be prudent to take notice!
During “The Great Recession of 2007-2009” , The Federal Reserve Board started Large Scale Asset Purchases( LSAP) which has since been coined: Quantitative Easing. QE is an expansionary monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to stimulate the economy and increase liquidity. Last week, in Chicago, Fed Chairman Jerome Powell shared new terminology, opening the door for “NEGATIVE” interest rate policy in the future. JP introduced the club to the effective lower bounds” (a.k.a. ELB) which added to the previous introduction of zero lower bound. I previously stated that the Fed will NEED to cut rates in 2019- 2020 and that the U. S. was headed for ZIRP(Zero Interest Rate Policy), NIRP(Negative Interest Rate Policy) and a recession.
Well guess what, the door was just opened and The Fed is about to walk through it. The Fed will shortly introduce the American people to new policy measures. I assure you, they will be telling us all" how wonderful it will be" and all of the positive effects, zero and negative interest rates will have.
I would implore you to look at Europe and Japan to see how negative interest rates have done nothing to spur growth nor inflation. In fact, it is having the exact opposite effect of the desired outcome. All while destroying their banking sectors.
This new policy introduction, which they will spin as a positive, has potentially devastating ramifications for our banking and financial sectors to start, and then will ripple through other sectors of our economy.
One simple example to consider are Pension Plans that must own fixed assets( bonds) for yield to provide stability and income to payout retirees. What happens when 50% of those fixed assets pay 0% or-. 25% or worse?
What if you have money in a bank and the bank is now charging you to hold your money?
How much and how long would you keep your money in that bank? I would be looking to buy stock in companies that build safes, because everyone will be going out and buying one to put their cash in for “safe” storage. Again, I know this sounds absolutely crazy, but if I were you I would again look at the countries that already have ZIRP& NIRP.
LONG TERM BOND YIELDS EUROZONE
Referring to the charts above and to the below, There is already$ 12 trillion in negative yielding bonds outstanding across the world. Germany’ s BUND just hit its lowest yield EVER at -.25%. Switzerland is at -.75%!
Source: Bloomberg Finance
I would contend The Fed is unaware of the implications negative rates may unleash in the U. S. economy. First, this could cause a run on banks, since we would have to pay the banks to hold our money. I know, sounds totally irrational. Again, this is not a what if. This is already happening in other countries.
The Fed raised rates too far, too fast (again) while interest rates around the world have remained low, due to lack of growth and inflation.
Source: Topdown Charts
Historically, the level of Fed rate cuts that are currently being priced in only come prior to recessions or severe financial stress. Earlier this month, we woke up to Deutsch Bank being bailed out by the ECB and taxpayers of the Eurozone by the establishment of a “bad bank.”
The current priced amount of Fed cuts have historically only come ahead of global recessions or severe financial distress.
Source: JP Morgan
Deutsch Bank has no idea the size of their derivative book. The estimates are between $50 billion and $70 trillion. No, these are not typo’s. These are denominated in U.S. Dollars. Deutsch Bank doesn’t even know the magnitude.
Pay attention to this… it is the beginning of what could start to spiral out of control.
The Fed, Jerome Powell, Treasury Secretary Mnuchin, President Trump nor anyone else knows how this ends nor what the effects will be throughout our economy. Initially this will cause massive market volatility.
Here are a few quick facts:
- S& P 500 near all time highsUnemployment near historic lows Fed Funds Rate: 2. 25- 2. 5% Inflation Sub 2%
- GDP 3% ( ish) ( Future GDP expectations dropping quickly) Economic data mixed but deteriorating( quickly)
- Trump Touting“ The Best Economy Ever”.
- Larry Kudlow, Director of the National Economic Council stating the following: Click Here To Watch
This video was taken from from The White House on May 3rd, which may just mark the peak of this cycle and its inevitable fall from grace.
Does it make sense with the above 8 facts that the markets are screaming for rate cuts? Historically, Fed rate cuts come at the end of economic cycles.
The great powers at be denied the .com bubble, denied the mortgage/real estate bubble, and now they are denying the “everything bubble.”
Source: St. Louis Fed
TRADE WAR RESOLUTION
There will be NO trade deal until Post-2020 Elections. I have been sharing with everyone, China will wait it out to see if Trump gets re-elected and then decide their next course of action. They are digging in for a long drawn out trade battle. This is evident as they have begun devaluing their currency and increased their Gold purchases to reduce their dollar denominated assets. They have also slowed the purchase of Long Term Treasuries and shortened their duration of the US Government Bond holdings in recent months.
We have been on recession watch since April 2018. I received correspondence asking why, when the economy looked so strong. At that time, the yield on the 10- year Treasury note was almost 3%. I shared with everyone that I felt that interest rates were too high and would come down.
At that time the financial media stated rates were going higher and a recession was not in the future. The proof is here. Rates on 10-Year Treasury Bonds are 2.00% as of Friday June 25th.
I also shared that S&P earnings expectations would need to come down, and they have and they will continue to come down. Equity markets cannot remain near all time highs in the face of deteriorating earnings and data. Talks of recession have entered the financial arena on a daily basis. Many are saying“ this time is different.” Time will tell if it is or is not.
The markets are headed for a major inflection point. More importantly, what are we doing to mitigate the risks we are seeing in our portfolios?
- Increased cash positions on all accounts
- Reduced equity allocations to the minimum amount
- Hedged ALL portfolios to profit from coming volatility
- Increased fixed income exposure to long term treasuries
- Added gold miners
Timing exactly when a recession or bear market may occur is near impossible.
So we have moved in advance of the decline in anticipation of such an event starting within the next 6-12 months, which is exactly when I said it would start back in April 2018. It does not seem worth chasing a market higher when we feel there is potential downside risk of 25-50%. We have had two 50% market corrections since 2000. If a 50% market correction is the “new normal” every decade or so, retirees that need growth are in for a challenging environment.
It is very possible The Fed may initiate Special Purchase Vehicles (SPV’s) that will be established to start buying equities to help artificially prop up equity markets. Again, I know this sounds insane, but Japan is already doing it! The ECB has considered it, and Janet Yellen in 2016 openly discussed this topic. Nothing would surprise me. Governments propping up equity markets is very dangerous and will end badly.
As always, if you have any questions or would like to discuss your Risk Tolerance please give me a call. I will share with you the data I am tracking to help you understand our current position based upon the facts.
Disclosure: I am/we are long TLT, VXX, PSQ, SH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC (FINRA/SIPC). American Portfolios Financial Services, Inc. and American Portfolios Advisors, Inc. are not affiliated with any other named business entities mentioned.
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