Why would you want to stay in a currency its sponsors are hell-bent on debasing? From Simon Black at sovereignman.com:
Ray Dalio is the founder of one of the largest investment firms in the world and has amassed a personal fortune nearing $20 billion from his business and investment acumen.
In short, he understands money and finance in way that most people never will. And it’s for this reason that his latest insights are so noteworthy.
In a recent, self-published article entitled “Why in the World Would You Own Bonds When. . .”, Dalio makes some blunt assertions about the alarming US national debt, the decline of the dollar, and other negative trends in the Land of the Free.
Here’s a summary of the major points:
1) Interest rates are now so low that “investing in bonds (and most financial assets) has become stupid.”
Dalio points out that bond yields are so low today that investors would essentially have to wait more than 500 years to break even on their bond investments after adjusting for inflation.
That’s why sensible people are already ditching the bond market.
JP Morgan’s CEO Jamie Dimon recently said he wouldn’t touch a US government 10-year Treasury Note “with a ten foot pole.” Neither would Dalio, as he told Bloomberg this month.
2) This is a big problem for Uncle Sam. Investors are ditching US government bonds at a time when the US is “overspending and overborrowing”.
They just passed a $1.9 trillion stimulus, and they have another $3 trillion spending package ready to go, plus plenty of momentum for Universal Basic Income, health care, Green New Deal, and just about everything else.
In short, the government is going to have to sell a LOT of bonds (i.e. increase the debt) at a time when investing in bonds has become stupid.
It all seems so easy, just buy low and sell high (or sell high and buy low). So how come so many people do the exact opposite? From doug Casey at internationalman.com:
International Man: Markets have extreme emotions. They can go from irrational exuberance—where it seems everyone is swinging from the chandeliers—to a bottom-of-the-barrel bear market where people don’t even want to look at the business section.
Why is assessing the psychology of the market so important?
Doug Casey: The market, as Warren Buffett has pointed out, can be either a weighing machine or a voting machine. You can make money in the market either way, but you have to recognize which machine is giving you signals.
Although Mr. Market sees and knows almost everything, he pays the most attention to the voting machine, because he’s basically bipolar, a manic-depressive. As a result, not only do you have to deal with the psychological aberrations of millions of other people who are running in a crowd and voting with their dollars, but much more important, you have to deal with your own psychology. You are, after all, part of the market.
The only thing you can control, however, is your own psychology, not that of the market’s other participants. Once again quoting Buffett, “Be fearful when others are greedy. Be greedy when others are fearful.”
It’s a matter of having good psychological judgment. Everybody wants to be a contrarian, and perhaps they think they are a contrarian. But, in reality, it’s hard to be a contrarian.
Buy stocks because bonds are so central-bank suppressed that they’re the guaranteed investment from hell. That’s what passes for wisdom on Wall Street these days. From David Stockman at davidstockmanscontracorner.com via lewrockwell.com:
Jerome Powell puts you in mind of the boy who killed both of his parents and then threw himself on the mercy of the court on the grounds that he was an orphan!
That’s what JayPo essentially did in his presser yesterday while trying to explain that the most hideous equity market bubble in history is actually not that at all:
“If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at,” Powell said.
“Admittedly P/Es are high but that’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically from a return perspective,” Powell said.
Right. The Fed has essentially murdered the bond yield. So relatively speaking, grossly inflated stocks are a bargain compared to dead-in-the-water bonds.
Bloomberg even has a chart to prove all this based on the so-called “Fed model”:
The S&P 500’s earnings yield – profit relative to share price – is 2.5 percentage points higher than the yield on 10-year Treasury notes. The comparison, loosely labeled the Fed model, sits well above what the spread was before the burst of the internet bubble, when bonds yielded more than equities by that measure.
Then again, the “earnings yield” is not exactly cash you can take to the bank, unlike a bond coupon as meager as it might be at present. The former is just a computational hope that today’s vastly inflated stock prices relative to earnings stay inflated indefinitely, world without end.
At this point the dollar is a buy and bonds and precious metals are a sell. From Charles Hugh Smith at oftwominds.com:
Triffin’s Paradox demands painful trade-offs to issue a reserve currency, and it demands the issuing central bank serve two competing audiences and markets.
Judging by the headlines and pundit chatter, the U.S. dollar is about to slide directly to zero. This sense of certitude is interesting, given that no empire prospered by devaluing its currency. Rather, devaluing the currency is a sure path to dissolution and collapse of the empire. This dynamic–devaluation leads to decline and collapse–is not exactly a secret.
So what all those proclaiming the death of the USD are saying is the Imperial Project is consciously choosing suicide, all to boost the U.S. stock market which is now little more than a signaling mechanism and a means of accelerating wealth inequality, as the billionaire class and the billionaire wannabe’s in the top .01% are the primary winners as stocks reach new highs.
(Recall that the U.S. economy is best described as anything goes and winners take most.)
Taking it one step further, those predicting the collapse of the U.S. dollar are predicting that not only will the Empire choose suicide, so will the billionaires because what will their fortunes be worth if the USD goes to zero?
The USD-is-dead crowd (and it is a crowd) present the demise as ordained by some mysterious force, as if the Empire has no will or power to resist the inevitable slide to zero. The helpless giant can only watch as the Federal Reserve debauches the dollar to boost stocks and float the mountains of debt required to keep the U.S. economy from imploding.
The USD-is-dead crowd also seems to overlook the inconvenient fact that all the other issuers of fiat currency are busy debauching their currencies, too by the same mechanisms: the endless digital printing of new currency, distributed to already-insanely-wealthy financiers and corporations. (Debt-serfs can “save themselves” by borrowing more, heh.)
We get it: digitally printing trillions in excess of actual productivity eventually destroys the purchasing power of the over-issued currency. We also get the need to keep interest rates at near-zero so governments can fund endless trillions in stimulus and other giveaways–billions to the billionaires and a trickle of bread-and-circuses to the debt-serfs.
The deep state will be your enemy, not your friend, when collapse finally arrives. From Doug Casey at internationalman.com:
Almost everyone looks for a political solution to problems. However, once a Deep State situation has taken over, only a revolution or a dictatorship can turn it around, and probably only in a small country.
Maybe you’re thinking you should get behind somebody like Ron Paul (I didn’t say Rand Paul), should such a person materialize. That would be futile.
Here’s what would happen in the totally impossible scenario that this person was elected and tried to act like a Lee Kuan Yew or an Augusto Pinochet against the Deep State:
First, there would be a “sit-down” with the top dogs of the Praetorian agencies and a bunch of Pentagon officers to explain the way things work.
Then, should he survive, he would be impeached by the running dogs of Congress.
Then, should he survive, whipped dog Americans would revolt at the prospect of having their doggy dishes broken.
Remember, your fellow Americans not only elected Obama, but re-elected him. Do you expect they’ll be more rational as the Greater Depression deepens? Maybe you think the police and the military will somehow help. Forget it…they’re part of the problem. They’re here to protect and serve their colleagues first, then their employer (the State), and only then the public. But the whipped dog likes to parrot: “Thank you for your service.” Which is further proof that there’s no hope.
Jeffrey Gundlach is one of the world’s most astute bond fund managers and economic prognosticators. From Martin Luscher at Finanz und Wirtscaft via zerohedge.com:
Central banks are easing, and stocks have reached a record high. But that doesn’t mean that everything is okay. Jeffrey Gundlach sees big trouble ahead. The CEO of the investment firm DoubleLine is worried about the development of corporate debt. But also the levels of government debt and the US equity markets are not sustainable. According to Gundlach, investors have to brace for significant disruptions.
Mr. Gundlach, what would you recommend to investors?
They need to position themselves for the next global downturn because it will lead to substantial changes in the markets.
When will the downturn come?
It doesn’t matter whether it comes in one year or four. If you don’t start preparing now, you will maybe do better while the economy continues to do okay, but whatever gain you get from that will be overwhelmed by problems with your investments in the downturn.
Michael Burry was one of the heroes of Michael Lewis’s book The Big Short. Now he’s got another big short. From Tyler Durden at zerohedge.com:
Last week, the Big Short’s Michael Burry sparked a fresh wave of outrage among the Gen-Z and algo traders (if not so much the handful of humans who have actually witnessed a bear market) on Wall Street, by calling the darling of modern capital markets – passive, or index/ETF, investing – the next CDO bubble. Echoing what many skeptics before him have said, Burry argued that record passive inflows, coupled with active fund outflows which suggest passive equity funds will surpass active by 2022 according to BofA…
… are distorting prices for stocks and bonds in much the same way that CDOs did for subprime mortgages. Eventually, the flows will reverse at some point, and when they do, “it will be ugly.”
This nascent passive bubble is also why Burry had avoided large caps and was focusing entirely on small-cap value stocks: to Burry, they tend to be underrepresented in index funds, or left out entirely, which is why they are i) cheap and also why ii) when the passive bubble bursts, they will be the few names left standing.
By mark-to-market accounting, or as it’s sometimes known, honest accounting, the Fed’s losses on its bond portfolio are greater than it’s capital. In other words, it’s broke. From Simon Black at sovereignman.com:
In the year 1157, the Republic of Venice was in the midst of war and in desperate need of funds.
It wasn’t the first time in history that a government needed to borrow money to fight a war. But the Venetians came up with an innovative idea:
Every citizen who loaned money to the government was to receive an official paper certificate guaranteeing that the state would make interest payments.
Those certificates could then be transferred to other people… and the government would make payments to whoever held the certificate at the time.
In this way, the loan that an investor made to the government essentially became an asset– one that he could sell to another investor in the future.
This was the first real government bond. And the idea ultimately created a robust market of investors who would buy and sell these securities.
When a government’s fortunes changed and its ability to make interest payments was in doubt, the price of the bond fell. When confidence was high, bond prices rose.
It’s not much different today. Governments still borrow money by issuing bonds, and those bonds trade in a robust marketplace where countless investors buy and sell on a daily basis.
Two financial market truisms: markets can change on a dime, and they go down quicker than they go up. From John Rubino at dollarcollapse.com:
“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
― Ernest Hemingway, The Sun Also Rises
On the surface, nothing much changed last week. The Fed, as expected, raised short-term interest rates very modestly, the US, Canada and Mexico cut a new NAFTA deal (kind of a pleasant surprise), unemployment fell again, Trump continued to tweet while Democrats and Republicans continued to express their mutual disdain via dirty tricks and contrived insults. Business as usual, in other words, in our dysfunctional new normal.
Bondholders usually get nervous about failing companies before stockholders. That looks to be the case with Tesla. From Wolf Richter at wolfstreet.com:
In terms of Tesla’s survival, this poses a problem.
Tesla shares fell 2.8% to $280.74 on Wednesday. They’re now down about $100 from the closing price of August 7 ($379.57) and down $107 from the high that day ($387.46). This was the moment when CEO Elon Musk had pulled another rabbit out of the hat during trading hours in order to brazenly manipulate up the share price by announcing a blatant lie – that he’d take the company private at $420 a share, “funding secured.” Today, shares closed $140 below the buyout-lie number.
The ludicrousness of his lie that had instantly spread all over the world had an unintended consequence for eons to come: The term “funding secured” can never again be pronounced with a straight face.
As a consequence, Tesla is now steeped in legal issues. It’s not like it doesn’t have enough issues already, with its “manufacturing hell,” as Musk himself called it, that refuses to abate.
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