The Subprime Loan Crisis Is Back…Here’s What It Could Mean for the Economy

By Justin Spittler

Subprime loans are going bad again. A “subprime” loan is a loan made to someone with bad credit. If the term sounds familiar, it’s because lenders issued millions of subprime loans during the early to mid-2000s. Banks made these risky loans thinking housing prices would “never fall.” When they did, subprime borrowers stopped paying their mortgages. The U.S. housing market collapsed, triggering the worst economic downturn since the Great Depression.

These days, lenders aren’t making as many reckless mortgages. But subprime lending is alive and well in the auto market. Since the financial crisis, subprime auto lending has exploded. According to Experian, subprime auto loans now make up more than 20% of all U.S. auto loans. Millions of Americans with bad credit now own cars they should have never bought in the first place. Risky subprime loans have also made the auto loan market incredibly fragile.

Right now, people are falling behind on their car loans at an alarming rate. As you'll see, this isn't just a big problem for lenders and car companies. It could also spell trouble for the entire U.S. economy.

Subprime auto loan delinquencies are skyrocketing…..
CNBC reported on Friday:

Delinquencies of at least 60 days for subprime auto loans are up 13 percent month over month for July, according to Fitch Ratings, and 17 percent higher from the same period a year ago.

Folks with good credit are falling behind on their car loans too. CNBC continues:

Even prime delinquencies are on the rise — Fitch Ratings' survey said that last month's prime auto loans were 21 percent more delinquent than in July 2015.

Prime loans are loans made to people with good credit.

The auto industry is preparing for more delinquencies…..
Last month, Ford (F) and General Motors (GM) warned that rising delinquencies could hurt their businesses in the second half of this year.
According to USA Today, both giant carmakers have set aside millions of dollars to cover potential losses:

In a quarterly filing with the Securities and Exchange Commission, Ford reported in the first half of this year it allowed $449 million for credit losses, a 34% increase from the first half of 2015.
General Motors reported in a similar filing that it set aside $864 million for credit losses in that same period of 2016, up 14% from a year earlier.

Investors who own subprime loans are taking heavy losses.....

USA Today reported on Thursday:

[T]hese loans are packaged into bundles which are sold to investors, much like mortgages were packaged into bundles a decade ago before rising interest rates caused many of them to default, eventually triggering the deepest economic crisis since the Great Depression. The annualized net loss rate — the percentage of those subprime loan bundles regarded as likely to default — rose 7.39% in July, up 28% from July 2015.

You may recall that Wall Street did the same thing with mortgages during the housing boom. They made securities from a bunch of bad mortgages. They marked them as safe and then sold them to investors. When the underlying mortgages went bad, folks who owned these securities suffered huge losses. These dangerous products allowed the housing crisis to turn into a full-blown global financial crisis.

By itself, a collapse of the auto loan market probably won’t trigger a repeat of the 2008 financial crisis..…

That’s because the auto loan market is much smaller than the mortgage market. The value of outstanding auto loans is “only” about $1 trillion. While that’s an all-time high, the auto loan market comes nowhere close to the $10 trillion residential mortgage market. Still, we’re keeping a close eye on the auto loan market.

If Americans are struggling to pay their car loans, they’re going to have trouble paying their mortgages, student loans, and credit cards too. This would obviously create problems for lenders and credit card companies. It will also hurt companies that depend on credit to make money.

E.B. Tucker, editor of The Casey Report, is shorting one of America’s most vulnerable retailers..…
In June, E.B. shorted (bet against) one of America’s biggest jewelry companies. According to E.B., credit customers make up 62% of its customers. These customers are 350% more valuable to the company than cash customers.

In other words, this company depends heavily on credit. This is a huge problem…and will only get worse as more folks continue to fall behind on their credit card bills—or stop paying them altogether. This is already happening at the company E.B shorted. He explained in the June issue of The Casey Report:

And the company is facing another problem…consumers failing to pay back their loans. From 2014 to fiscal 2016, its annual bad debt expenses rose from $138 million to $190 million. That’s a 30% increase. Over the same period, credit sales grew by only 20%. That means bad debt expenses rose 50% faster than credit sales.

He warned that “tough times are coming for the jewelry business.”

E.B.’s call was spot on..…
Last Thursday, the company reported bad second quarter results. For the second straight quarter, the company’s earnings fell short of analysts’ estimates. The company’s stock plummeted 13% on the news. It’s now down 10% since E.B. recommended shorting it in June. But E.B. says the stock is headed even lower:

We think there’s more pain to come as credit financing dries up…sales continue to drop…and more loans go unpaid.

You can learn more about this short by signing up for The Casey Report. If you act today, you can begin for just $49 a year. Watch this short video to learn how.

This is easily one of the best deals you'll come across in our industry..…
That’s because Casey readers are crushing the market. E.B.’s portfolio is up 19% this year. He’s beat the S&P 500 3-to-1. What’s more, Casey Report readers are set up to make money no matter what happens to the economy—and that’s never been more important. To learn why, watch this short presentation.

Chart of the Day

Not all dividend-paying stocks are safe to own..…

Today’s chart compares the annual dividend yield of the U.S. 10-year Treasury with the annual dividend yield of the S&P 500. Right now, 10 years are paying about 1.5%. Companies in the S&P 500 are yielding 2.0%.

You can see the S&P 500 almost never yields more than 10 years. It’s only happened two other times since 1958. The first time was during the 2008 financial crisis. The other time was just after the recession.
If you’ve been reading the Dispatch, you know the Federal Reserve is partly responsible for this. For the past eight years, the Fed has held its key interest rate near zero. This caused bond yields to crash. With Treasuries yielding next to nothing, many investors have bought stocks for income. But there’s a problem.

Companies in the S&P 500 are paying out $0.38 for every $1.00 they make in earnings. That’s close to an all time high. About 44 companies in the S&P 500 are paying out more in dividends than they earned over the past year. Meanwhile, corporate earnings have been in decline since 2014. Clearly, companies can’t continue to pay out near-record dividends for much longer.

As we explained yesterday, some companies may cut their dividends. This could cause certain dividend-paying stocks to crash. Some investors could see years’ worth of income disappear in a day. If you own a stock for its dividend, make sure the company can keep paying you even if the economy runs into trouble. We like companies with healthy payout ratios, little or no debt, and proven dividend track records.

The article The Subprime Loan Crisis Is Back…Here’s What It Could Mean for the Economy was originally published at caseyresearch.com.

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How Negative Interest Rates Will Turbocharge the Migrant Crisis

By Nick Giambruno

In the 1989 Batman movie, the Joker (played by Jack Nicholson) showers a crowded Gotham street with free money. In the scene, it looks like it’s raining hundred dollar bills. The people love it. Little do they know, the money is actually a trap. Once the Joker has lured them into the street, he unleashes poisonous gas.

I think the latest gimmick to stimulate the economy is pretty much the same thing. It’s one of the most absurd ideas I’ve heard in a while. And that’s saying something, considering the outrageous schemes our economic luminaries have recently come up with, like..…

• Faking a space alien invasion to help stimulate the economy.
• Minting a trillion dollar coin.
• Negative interest rates.
• Banning physical cash.
• Cash for clunkers.
• Increasing rounds of money printing, euphemistically called “quantitative easing.”

These ideas would be comical if people in power didn’t actually take them seriously. But they do. It’s the same bad medicine the economic witch doctors have been prescribing for years. With a track record like this, it’s hard to imagine they could come up with something even more ridiculous. But they have. This latest gimmick goes well beyond the absurdity of their previous ideas. It’s verifiably insane. And the scariest part is, this dangerous idea is gaining currency. It’s spreading across the world like a smallpox outbreak.

Helicopter Money

Politicians and establishment economists call this scary idea “a basic income.” I call it sheer lunacy. It’s where the government gives you money just because. There’s no requirement to work or even display a willingness to work. You could sit at home all day, watch TV, and still get a check from the government. Simply put, a basic income is “free” money the government hands out to everyone unconditionally. European politicians are heavily pushing this policy.

• Finland wants to pay its citizens around $1,000 a month.
• The Netherlands and the U.K. have also proposed dishing out free money.
• In Switzerland, there’s a proposal to hand out around $2,800 a month to everyone. This one is surprising since the Swiss are generally sensible about money.
• The basic income virus has also infected Canada, which recently announced a pilot program in Ontario.

It’s just a matter of time before the idea gains traction in the U.S. In fact, U.S. central economic planners are already discussing it. You might recall former Fed chair Ben Bernanke’s nickname, “Helicopter Ben.” He got the name after he spoke publicly about using helicopter drops of money to “stimulate” the economy. This is just another flavor of a basic income.

Whether you call it free money, a basic income, or helicopter money, the idea is spreading. It’s the next potion the economic witch doctors will use once their latest scam—negative interest rates—not only fails to cure our economic ailments, but predictably makes them worse. No matter, the idea will be politically popular. Who would protest free money?

And, once a country adopts a basic income, it would be next to impossible to get rid of it until the system collapses under its own weight. Who would vote for a politician that stops (or even slows down) the gravy train? The Joker used free money to lure the people of Gotham to poisonous gas. Now real world politicians are using the same trick. They’re using free money to lure the masses into perpetual dependence on government.

More Problems Ahead for Europe

If Europeans think they have a migrant problem now, just wait until they institute a basic income. It’s obvious what will happen….Once European governments start handing every person thousands of dollars in free money each month (more than many in Africa make in a year), everyone will be scrambling for Europe.

A basic income is a sure recipe for economic disaster and increased cultural tensions. It’s an environment where blowhards and demagogues flourish. Unfortunately, this has happened repeatedly throughout Europe’s history. Once again, it’s going to lead to some very bad things.

I think a basic income will greatly accelerate this recurring trend.

Without a basic income and other welfare benefits, immigrants are usually skilled and the very best of people. But the average European will surely forget that once free money draws in the world’s riffraff. This is why, although the financial effects will be severe, the sociopolitical ones will be much worse.

Here’s the bottom line: All you can do is protect yourself from the consequences of all this stupidity. This is a big reason why I think everyone should own some gold. Gold is the ultimate form of wealth insurance. It’s preserved wealth for thousands of years through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

Unfortunately, most people have no idea how to prepare for the next economic collapse…..

How will you protect your savings in the event of a crisis? This just released video will show you exactly how. Click here to watch it now.

The article How Negative Interest Rates Will Turbocharge the Migrant Crisis was originally published at caseyresearch.com.

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Hillary’s Scary New Cash Tax

By Justin Spittler

Have you heard of “negative interest rates?” It’s become a phenomenon with economists and the media. There’s a good chance you’ve read an article about it. We’ve covered it many times in the Dispatch. I’m writing to tell you something about negative interest rates you haven’t heard. You certainly won’t hear about it in the mainstream press.

What’s coming at you is a historic event. It’s something our grandchildren will hear stories about...much like the Great Depression or the Cold War. What’s coming could send the price of gold much higher in the coming years...and hand gold stock owners 500%+ gains. If you know what’s coming, it could mean the difference between having lots of free cash in retirement or barely getting by.

To understand the gravity of this moment, let’s cover one of the most bizarre ideas in the world...Negative Interest Rates. In a normal world, your bank pays you interest on your savings. It takes your money, pools it with other people’s money, and loans it out. The bank makes money by paying out less in interest on your deposit than it earns in interest from borrowers.

For example, it might pay out 3% to depositors while earning 6% from borrowers. This is how it has worked for decades. Negative interest rates turn your “normal” bank account upside down. Negative interest rates could only exist in a crazy world where idiot politicians are in control. Unfortunately, that’s just what we’re dealing with right now. Politicians all over the world are ordering banks to charge depositors (you) a fee for storing cash.

It’s a perversion of saving. It’s a perversion of capitalism. It’s a perversion of planning for the future.
And it’s going to result in disaster. Politicians think that by making it unattractive for you to keep money in the bank, you’ll save less money. Instead, you’ll spend more money on things like smartphones and cars. You’ll invest in things like stocks and real estate. This would “stimulate” the economy.

This thinking is very, very wrong. No matter what the government does, it can’t force you to spend money. It can’t force you to make investments if you don’t see good opportunities. Forcing people to pay banks to hold their money is a tax. It is wealth confiscation for the digital age.

The government and the mainstream press won’t dare call it a tax. But that’s exactly what it is. A negative interest rate policy is a tax. Any time you hear a politician, central banker, or news anchor say “negative interest rates,” just think “TAX.” Think “TAX ON MY CASH”. I’ll say it again: Negative interest rates are going to result in financial disaster.

The coming disaster will wipe out many people. But you don’t have to be one them. I’ll explain how you can sidestep this disaster—and even make a lot of money as a result of it—in a moment. But let’s quickly cover one more thing about negative interest rates.

The Ugly Twin Sister of Negative Interest Rates

If the government makes it unattractive for you to keep cash in the bank, you can pull cash out of the bank. You can simply store it in a safe or under the mattress. Politicians know this. That’s why they’ve created another dangerous policy that works hand-in-glove with negative interest rates. That policy is banning cash.
You see, if you pull your money out of the banking system and stuff it under the mattress, you aren’t doing what the government wants you to do.

You’re not spending money or investing in stocks. This is a major reason why governments are banning large cash transactions and large denomination bills.

They are fighting a War on "Cash". In just the past few years…

• Spain banned cash transactions over 2,500 euros
• Italy banned cash transactions over 1,000 euros
• France banned cash transactions over 1,000 euros, down from the previous limit of 3,000 euros

And just a few weeks ago, former U.S. Treasury Secretary Larry Summers called for a ban on the $100 bill!
Historians aren’t surprised by Summers’ idea. Franklin Delano Roosevelt banned $500 and $1,000 bills in the 1930s. You can bet that Big Government types like Hillary Clinton and Donald Trump will do the same thing in a financial emergency.

By making it so difficult (or illegal) to buy and sell things with cash, the government wants to force people into the banking system. That way it can monitor us and coerce us into whatever it wants...like pay outrageous new taxes.

It’s all a dream come true for government central planners.

The governments say these new currency laws are for fighting terrorism, money laundering, and drugs.
But the ultimate goal is control of society…and to confiscate the wealth of private citizens. As congressman Ron Paul said, “The cashless society is the IRS’s dream: total knowledge of, and control over, the finances of every single American.”

Whether you agree with these regulations or not, the conclusion is obvious. By driving us more and more towards trackable digital payments, the government has made it much, much easier to confiscate our wealth. We’re like sheep that have been “herded” into a corral, ready for shearing. And Hillary Clinton (and her Big Government cronies) is holding the clippers. However, you don’t have to be sheared. You can avoid the shearing by learning how to navigate what will become the largest underground currency market in history.

Hillary Doesn’t Want Your Gold. She Wants Your Cash

On April 5th, 1933, president Franklin Delano Roosevelt issued one of the most controversial orders in U.S. history. It went by the name “Executive Order 6102” Not one American in 1,000 knows about this order. But to this day, many experts consider it to be one of the most destructive acts in U.S. history. It violated sacred principles held by our founding fathers. It impoverished millions and confiscated the savings of honest, hardworking Americans.

Executive Order 6102 made it illegal for private citizens to own gold. Citizens were ordered to turn in their gold to the government. Why would the government confiscate the wealth of private citizens? You can fill a book on the history surrounding Executive Order 6102. But in a nutshell, it was the act of a desperate government in the midst of a financial crisis. The government wanted the gold in order to increase the nation’s money supply. It believed an increase in the money supply would revive the struggling economy.

Please review those last two paragraphs.....

An increase in the money supply...a struggling economy...a desperate government. Sound similar to what is happening right now? Since the answer to that question is “YES,” we have to ask another question. Could such a confiscation happen again?

As the crisis develops, our deeply indebted government will act like a giant wounded beast, lashing out in all directions. It will grow more desperate for control. It will grow desperate for money. And just like FDR did in the 1930s, it will confiscate the wealth of private citizens. But Hillary Clinton (or Donald Trump, or whoever wins the election) won’t go after your gold. Nowadays, the gold market is very small compared to the overall economy.

Going after gold would be too much work for the government. The government is going to go after YOUR CASH. It will regulate your cash. It will tax your cash. It will take your cash. This has all kinds of implications for banking and the economy.

But here’s the most important thing you need to know as an investor. Negative interest rates and their partner, the War on Cash, will create a renewed interest in gold. This could cause gold to double or even triple in value. Even children know what the government is doing is crazy. And people aren’t going to take this lying down.

Rather than participate in the government’s mgovernment, onetary farce, people will go underground. They will pull cash out of banks and hoard it in safe places. And they will seek the safety, anonymity, and reliability of gold and silver. Gold and silver have served as money for centuries. Gold is the ultimate currency because it doesn’t rot or corrode...it is durable…easily divisible...portable...has intrinsic value…is consistent around the world...and it cannot be created from thin air. It cannot be debased by the government.

By enforcing negative interest rates and fighting a War on Cash, the government will create a huge underground currency market. And the ultimate underground currency will be gold and its sister metal, silver. Gold is trading for around $1,260 an ounce right now. As the government blunders into a negative interest rate disaster, gold will likely rise 50%...100%...possibly even 200% higher. There’s an underground currency market coming to your neighborhood.

If you own enough gold, you’ll be its king.
If you don’t yet own gold, buy it now.
If you own a lot of gold, buy more.

Regards,
Brian Hunt

---

Editor’s Note: Brian just alerted readers to an extremely rare opportunity in the gold market…one that could lead to 500%+ gains in a short period. This situation has only occurred a handful of times in the last 20 years. But every time it occurs, some investors see gains as large as 1,700%, 4,300%, and 5,000%.

If you’re interested in this idea, please act now. With gold prices surging, the window of opportunity won’t be open long. And once it closes, we likely won’t get another one for years. Read more here. The article Hillary’s Scary New Cash Tax was originally published at caseyresearch.com.


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Janet Yellen: The Best Pick Pocket in the USA

By Tony Sagami

“Some of the experiences [in Europe] suggest maybe we can use negative interest rates.”
—William Dudley, President of the New York Federal Reserve Bank

“We see now in the past few years that it [negative interest rates] has been made to work in some European countries. So I would think that in a future episode that the Fed would consider it.”
—Ben Bernanke

“Indeed, I would be open to the possibility of reducing the fed funds target funds range even further, as a way of producing better labor market outcomes.”
—Narayana Kocherlakota, President of the Minneapolis Federal Reserve Bank

If you are planning to travel to any major European city, you better watch your wallet because there are thousands of very skilled pickpockets looking to separate you from your valuables. Those pickpockets, however, will only get away with however much money you have in your wallet. Sure, a pickpocket can throw a major monkey wrench into your vacation, but the amount these European thieves take from you is peanuts compared to what Fed head Janet Yellen wants to steal from your bank account.

While Wall Street experts and CNBC talking heads regularly debate the "will they or won’t they" interest rate liftoff, a more important question is whether or not the Federal Reserve will follow the European model of negative interest rates. Negative interest rates are nothing unusual in Europe as several central banks lowered key interest rates below 0%.

Yup, that means investors essentially pay a fee to park their money.

That parking fee just got higher last week when the European Central Bank cut its already negative deposit rate from minus 0.2% to minus 0.3%. The ECB also expanded is current quantitative easing program. The European Central Bank, the Swiss National Bank, and the Danish National Bank all have interest rates below zero. In fact, the Danes have held their overnight rates at negative 0.75% since 2012.

The Swiss, however, are the undisputed leaders of the negative interest rate experiment. The SNB first moved to negative rates in December 2014 and then dropped rates to negative 0.75% in January of this year. The Swiss National Bank, by the way, meets in a couple of days, on December 10, and is widely expected to cut rates again.

The question, of course, is how negative can interest rates go? Before the end of December, I expect deposit rates in Switzerland to be between -100bps and -125bps. Remember, we’re not talking about some backwater, third world countries here. Switzerland and Germany are two of the wealthiest countries in the world, as well as the home of major financial and political centers.

And I’m not just talking about short term paper either. Finland, Germany, France, Switzerland, and Japan are all selling five year debt with negative yields. In fact, Switzerland became the first country in history to sell benchmark 10 year debt at a negative interest rate in April.

Don’t think that negative interest rates can happen in the US? Wrong!

You may have missed it, but the United States is now also a member of the “0% club”—most recently in October, when it sold $21 billion worth of 3 month bills at 0% interest.

However, that is not the first time. Since 2008, the US government has held 46 Treasury bill auctions where yields have been zero. The next step after zero is negative… and it’s becoming a real possibility. Welcome to the European model of starving savers to death!

The implications for investors are monumental.

Ask yourself, what would you do with your money if your bank started to charge you to deposit it there? Would you pay hundreds, perhaps thousands of dollars a year just to keep your money in a bank?

Option #1: Hold your nose and pay the fees.
Option #2: Move those dollars into the stock market; perhaps into dividend paying stocks.
Option #3: Buy real estate; perhaps income generating real estate.
Option #4: Invest in collectibles, like art or classic cars.
Option #5: Stuff your money under a mattress.

The point I am trying to make is, the rules for successful income investing have completely changed. If you are living (or plan on living) off the earnings of your savings, you better adapt your strategy to the new world of negative interest rates…..or plan on working as a Walmart greeter during your golden years.

Even if you think I’m nuts about negative interest rates coming to the US, there is no doubt that interest rates are not climbing anytime soon.

According to the Federal Reserve.....
"The Committee anticipates that inflation will remain quite low in the coming months.”
“The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate.”

With the US national debt approaching $19 trillion, our government doesn’t have any choice but to keep interest rates low. Sadly, our politicians are paying for their spendthrift ways by starving responsible savers.
But you can (and should) fight back by changing the way you think about investing for income. You can start by giving my high yield income letter, Yield Shark, a risk free try with 90 day money back guarantee.


Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: Janet Yellen: The Best Pick Pocket in the USA was originally published at mauldineconomics.com

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Recession Watch

By John Mauldin 

“Growth is never by mere chance; it is the result of forces working together.”– J.C. Penney

“Strength and growth come only through continuous effort and struggle.”– Napoleon Hill

“We’re lost, but we’re making good time.”– Yogi Berra

The Yogi Berra quote above, which was brought to my attention this week, seems an apt description of where the markets and the economy are today. Nobody is quite sure where we are or where we’re going, but we all seem to think we’re going to get there soon.

I think it’s pretty much a given that we’re in for a cyclical bear market in the coming quarters. The question is, will it be 1998 or 2001/2007? Will the recovery look V shaped, or will it drag out? Remember, there is always a recovery. But at the same time, there is always a recession out in front of us; and that fact of life is what makes for long and difficult recoveries, not to mention very deep bear markets.

The problem is that our most reliable indicator for a recession is no longer available to us. The Federal Reserve did a study, which has been replicated. They looked at 26 indicators with regard to their reliability in predicting a recession. There was only one that was accurate all the time, and that was an inverted yield curve of a particular length and depth. Interestingly, it worked almost a year in advance. The inverted yield curve indicator worked very well the last two recessions; but now, with the Federal Reserve holding interest rates at the zero bound, it is simply impossible to get a negative yield curve.

Understand, an inverted yield curve does not cause a recession. It is simply an indicator that an economy is under stress. So now we are in an environment where we can look only at “predictive” indicators that are not 100% reliable. Actually, most are not even close. Some indicators have predicted seven out of the last four recessions. Some never trigger at all.

Recession Watch
All that said, looking at data from the last few weeks suggests that we need to be on “recession watch.” Global GDP is clearly slowing down, and the data we are getting from the US suggests that we are going to see a serious falloff in GDP over the next few quarters. I want to look at the recent (very disappointing) employment numbers, earnings forecasts (and some funny accounting), credit spreads, total leverage in the system, and the overall environment where credit, which has been the fuel for growth, is under pressure. The totality of this data says that we have to be on alert for a recession, because a recession will mean a full-blown bear market (down at least 40%), rising unemployment, and (sadly) QE4.

The jobs report on Friday was just ugly. Private payrolls increased by just 118,000, which is about the minimum level needed for unemployment not to rise. Government payrolls added 24,000. There were serious downward revisions to the last two months, as well. August was taken down by 37,000 jobs, and July was reduced by 22,000. The last three months have averaged just 167,000 new jobs compared to 231,000 for the previous three months and 260,000 for the six months prior to that.

My friend David Rosenberg dug a little deeper into the numbers and noted: Adding insult to injury and revealing an even softer underbelly to this report was the contraction in the workweek to 34.5 hours from 34.6 hours in August, which is effectively equivalent to an added 348,000 job losses.

So take the headline number, tack on the downward revisions and the loss of labour input from the decline in the workweek, and the "real" payroll number was [a minus] 265,000. You read that right.

He added: “Have no doubt that if the contours of the job market continue on this recent surprising downward path… [m]arket chatter of QE four by March 2016 is going to be making the rounds.”
While the unemployment rate remained at 5.1%, it did so largely because of a significant drop in the labor participation rate, which is not a good way to enhance employment. Further, the U-6 unemployment number is still a rather depressing 10%. Those are the people who are working part-time but would like full time jobs, as well as discouraged and marginally attached workers. Very few part-time jobs pay enough to finance a middle class lifestyle.

Earnings Recession
Leo Kolivakis of Pension Pulse has a downbeat earnings season preview, aptly titled “A Looming Catastrophe Ahead?”

Analysts have been steadily cutting 3Q earnings projections, and those revisions threaten to make some richly priced stocks even more so. Thomson Reuters data shows analysts expect a 3.9% year over year decline in S&P 500 earnings. Expectations are falling for future quarters as well.

These expectations have some strategists talking about an “earnings recession.” Just as an economic recession is two consecutive quarters of falling GDP, an earnings recession is two consecutive quarters of falling corporate profits.

The headwinds are no mystery. China’s weaker import demand is hurting all kinds of companies, especially raw materials and infrastructure suppliers. Caterpillar (CAT) slashed its revenue forecast and announced 10,000 job cuts. That probably isn’t playing well in Peoria. Accompanying the falloff in Chinese demand is an increase in the number of containers coming into the US as the strong dollar allows us to buy more and sell less. Not a particularly useful combination.

I love this quote from a Reuters story: “How can we drive the market higher when all of these signals aren’t showing a lot of prosperity?” said Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta, Georgia, who cited earnings growth as one of the drivers of the market. As we all know, it is every portfolio manager’s job to “drive the market higher.” Daniel evidently wants to do his part.

Sadly, despite our best efforts, the stock market faces an uphill climb. More from Reuters: Even with the recent selloff, stocks are still expensive by some gauges. The S&P 500 Index is selling at roughly 16 times its expected earnings for the next 12 months, lower than this year's peak of 17.8 but higher than the historic mean of about 15. The index would have to drop to about 1,800 to bring valuations back to the long-term range. The S&P 500 closed at 1,931.34 on Friday [Sept 25].

Moreover, forward and trailing price-to-earnings ratios for the S&P 500 are converging, another sign of collapsing growth expectations. The trailing P/E stands at about 16.5, Thomson Reuters data shows. Last year at this time, the forward P/E was also 16 but the trailing was 17.6.

The last period of convergence was in 2009 when earnings were declining following the financial crisis. The Energy sector is the biggest drag on earnings, meaning that we now see analysts everywhere calculating estimates “ex energy.” I suppose this produces useful information, but if we are going to exclude the bottom outlier, shouldn’t we exclude the top outlier as well? Healthcare is carrying much of the earnings burden for S&P 500 stocks, but I have yet to see an ex healthcare or ex energy & healthcare estimate. A funny thing about earnings: they’ve been going up for the past year, even as top line revenue has not. Generally, those go hand in hand. What’s happening?

And for the answer I have a story. A few years ago I made an assumption as to how a new stream of income would be taxed. I made that assumption based on my knowledge of having had similar income in the ’80s and ’90s. It turned out the rules had changed, and I hit the end of the year owing what was for me a rather large sum, as I was also trying to finance and build my new apartment.

I told my tale of woe to my accountant, Darrell Cain, who obviously detected the distress in my voice. He smiled at me and said, “John, I have an elephant bullet.” He reached under the table and pulled out an imaginary elephant bullet. “This is a big bullet. But I only have one of them. Once you use this bullet you can never use it again. If another elephant comes down the road, there will be nothing you can do.”

And yes, there were some one time tax maneuvers that reduced my taxes to a manageable number. But as he said, those were a one time option.

There is no way to prove it, but I think corporate accountants have been using up their elephant bullets this past year, as corporations want to be able to maintain the fiction that earnings are rising, so that price to earnings ratios don’t come under stress and cause stock prices to fall. You can move expenses from quarter to quarter, put off certain spending, recharacterize certain expenses one time, and so on. I deeply suspect we are going to find that some recent corporate earnings have been of the smoke and mirrors type.

Further, as I’ve written in previous letters, earnings forecasts are notoriously trend-following and typically miss the turns. If earnings are beginning to fall – and it appears they are – it is highly likely that earnings estimates will miss to the downside. If we slide into a recession at the same time, they will miss to the downside rather dramatically.

Is GDP Flatlining?
The Commerce Department will release its first estimate for 3Q US GDP on Thursday, Oct. 29. By then we will be in the thick of earnings season and will already know how many companies performed.

In the big picture, income (corporate or individual) can’t grow unless the economy grows. GDP may be a flawed way to measure economic growth, but it is the best tool we have. Blue chip estimates right now are that it ran at near a 2.5% annualized growth rate last quarter. However, the Atlanta Fed has sharply revised their GDP estimate for the third quarter down to under 1%. (See chart below.)

Will economic growth come into harmony with income growth? We know they have to meet eventually. At present, it appears GDP will stay in slow growth mode. That means it probably won’t be able to pull earnings up with it.

High-Yield – Rising Defaults
High yield spreads have been tightening and interest rates have been rising for some time. This is starting to cause some distress in the high yield (otherwise known as junk bond) market. My friend Steve Blumenthal has been following and timing the high yield market for 20 years. He recently wrote the following, which I’m going to blatantly cut and paste as it clearly depicts the level of distress in the high yield market.

If credit becomes more difficult to get, then growth is going to come under stress as well. I note that corporations that I think of as issuing higher quality debt are paying 10%. Thank you very much. Ten percent interest rates don’t seem to me to be very low.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: Recession Watch was originally published at mauldineconomics.com.

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Weekly Crude Oil, Gold, Coffee and Sugar Markets Recap with Mike Seery

It's been a wild ride in the markets this week. And our trading partner Mike Seery is back this week to give our readers a weekly recap of the futures market. He has been a senior analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.

Crude oil futures in the August contract are trading far below their 20 and 100 day moving average settling in New York last week at 56.93 a barrel while currently trading at 52.66 down about $7 for the trading week hitting a three month low as I’ve been recommending a short position for quite some time and if you took that trade continue to place your stop loss above the 10 day high which currently stands at 59.70 as the chart structure will improve on a daily basis.

The next level of major support is at 49/51 as oversupply issues continue to hamper prices here in the short term coupled with the fact of a possible Chinese slowdown affecting many commodities especially oil prices, however if you did not take the original trade the chart structure is terrible at the current time as the risk/reward is not your favor so sit on the sidelines and look for better markets with less risk. The U.S dollar is sharply lower this afternoon as a possible deal with Greece is on the table, however the dollar is still up significantly in the year 2015 and that’s keeping pressure on commodities as deflation is a worldwide problem so play by the rules and place the proper stop loss as who knows how prices can go.
Trend: Lower
Chart Structure: Poor

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Gold futures in the August contract are trading below their 20 and 100 day moving average settling last week at 1,163 while currently trading at 1,160 down slightly and traded as low as 1,146 in Wednesdays trade hitting a three month low as I’ve been recommending a short position and if you took that trade place your stop loss above the 10 day high which currently stands at 1,188 risking around $28 or $1,000 per mini contract plus slippage and commission.

The chart structure will improve starting next week as the trend still remains bearish as I still see no reason why to own the precious metals as their looks to be agreement with Greece possibly over the weekend but all of the interest still lies in the S&P 500 in my opinion which is sharply higher this Friday afternoon. The U.S dollar is down 90 points today which generally is very bullish precious metals, however gold is unchanged this Friday afternoon as volatility remains low as platinum, copper, and palladium are all near contract lows which will pressure gold prices in the long run in my opinion so continue to play this to the downside while taking advantage of any price rally while maintaining the proper stop loss of 2% of your account balance on any given trade.
Trend: Lower
Chart Structure: Excellent

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Coffee futures in the December contract settled last week in New York at 131.15 while currently trading at 129.80 a pound slightly lower for the trading week still trading below its 20 and 100 day moving average telling you that the short term trend is to the downside and the long term trend is also to the downside as I’m now recommending a short position while placing your stop loss above the 10 day high which currently stands 137.40 risking around 800 points or $3,000 per contract plus slippage and commission as this trade should only be taken with a large trading account.

Coffee prices continue their slow grinding bearish trend with very little volatility as the fundamentals have improved with Brazilian coffee exports rising to a record in the crop year ending June 30th up 6.9% to 36.5 million bags but that has been unable to support prices as we continue to move lower because of oversupply. The chart structure will start to improve in the next couple of days lowering monetary risk as many of the commodity markets still look weak as anything grown in Brazil continue to be under pressure due to the fact that the Brazilian Real is still right near a historical low versus the U.S dollar.
Trend: Lower
Chart Structure: Solid

Sugar futures in the October contract are trading above their 20 day but still below their 100 day moving average telling you that the trend is mixed after settling last week in New York at 12.30 while currently trading at 12.12 slightly lower for the trading week as I’m currently sitting on the sidelines waiting for a trend to develop.

Sugar prices continue its long term bearish trend while trading sideways in recent weeks as a breakout to the upside is 12.69 and on the downside below 11.52 so look at other markets that are currently trending as sugar prices look to go nowhere. Volatility in sugar prices at the current time is relatively low as I still do think lower prices are ahead but prices remain choppy so keep a close eye on this market as oversupply issues continue to pressure sugar coupled with an extremely weak Brazilian Real versus the U.S dollar as there are very few fundamental bullish reasons to push prices up at the current time.
Trend: Mixed
Chart Structure: Solid

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Mike's Trading Theory

What Does Risk Management Mean To You? I generally tell people that the reason people lose money in commodities is not due to the fact that they are bad at predicting where prices are headed, however they are bad when it comes to losing trades and refusing to take a loss which results for heavy monetary losses that are difficult to come back from.

For example if a customer has $100,000 account in my opinion on any given trade he or she should risk 2% – 3% of the account value meaning if you are wrong the worst case scenario is still a $97,000 remaining balance, however what I always see is traders risking ridiculous amounts of money and instead of the 3% stop loss will risk 20% to 30% on any given trade or even higher therefore if you are wrong on two or three trades that $100,000 dollar account could dwindle down to nothing very quickly and I’ve seen it many times throughout my career.

What many traders forget to realize is they might have 4 or 5 commodity positions on and if you have too many contracts on all at the same time and all of those trades go against you which is very possible the losses can add up to be staggering so what I am suggesting to you is if you have $100,000 account risk between $2,000 – $3,000 per trade so if you lose on five straight trades the worst case scenario is that your down $15,000 and still have an $85,000 balance which is very possible to still come back from and your still in the game.

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Weekly Crude Oil, Gold, Silver and Coffee Markets Recap with Mike Seery

Our trading partner Mike Seery is back this week to give our readers a weekly recap of the futures market. He has been a senior analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.

Crude oil futures in the August contract are up $.25 this Thursday afternoon in New York as this is the last trading day of the week due to the Fourth of July holiday currently trading at 57.22 a barrel while settling last Friday at 59.63 hitting a 10 week low as I’ve been recommending a short position for over a month and if you took that trade you’ve been very patient as prices have gone nowhere except for yesterday’s trade finishing down over $2 so continue to place your stop above the 10 day high which stands at 61.57 as the chart structure will start to improve next week as well.

Crude oil prices are right at major support as the $57 level is critical in my opinion and if prices do break that I think we could head much lower so continue to play this to the downside as large supplies continue to put pressure on this market as a build in crude oil inventories surprised the market yesterday as the U.S dollar also remains stubbornly strong. Currently we are in the strong demand season for gasoline as many drivers will be on the road this weekend, however the trend is your friend and the trend no matter how stubborn it has been in recent weeks is to the downside in my opinion as I remain bearish.
Trend: Lower
Chart Structure: Improving

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Gold futures in the August contract settled last Friday at 1,173 an ounce while currently trading at 1,163 as I’ve been recommending a short position when prices broke the 1,170 level while placing your stop loss above the 10 day high which stands at 1,201 risking around $31 or $1,000 per mini contract plus slippage and commission. Gold futures are trading below their 20 and 100 day moving average breaking out to a 3 ½ month low as a possible retest of the contract low of 1,144 is in the cards in my opinion as I was recommending a short position a month ago getting stopped out so here I’m trying again to the downside as I’m a trend follower and the trend clearly in my opinion is lower.

Gold prices have been very weak despite a possible Greece exit while as I remain very pessimistic as I see no reason to own gold at the current time as the stock market still looks strong and if Greece cannot rally gold I don’t know what can so take advantage of any rallies as the chart structure will start to improve in the next couple of days as the stop will be lowered to 1,187 as the long-term downtrend line is also intact. As a trader you must forget about your previous trade’s winners or losers and stick with your trading system as sticking to the rules over the course of time is the way to go instead of constantly flip-flopping.
Trend: Lower
Chart Structure: Improving

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Silver futures in the September contract settled last Friday in New York at 15.77 an ounce while currently trading at 15.70 in a very nonvolatile shortened trading week as I’ve been recommending a short position when prices broke 15.80 and if you took that trade continue to place your stop above the 10 day high which stands at 16.26 risking around $560 per mini contract plus slippage and commission as the chart structure is very solid at the current time.

Silver futures are right at a four month low trading below their 20 and 100 day moving average telling you that the trend is to the downside as the chart structure will improve next week and will be lowered in Tuesdays trade to 16.04 so be patient as the monthly unemployment number was released today basically pretty neutral sending gold slightly lower and having very little impact on silver prices as the volatility has slowed down tremendously.

Silver prices generally are one of the most volatile commodities in the world, however in recent months has been very quiet but something will happen in this market as I’m hoping it’s to the downside as I see no reason to own the precious metals at the current time as I still do believe all of the interest lies in the S&P 500 as money flows will continue to flow out of the precious metals and put into the stock market in my opinion.
Trend: Lower
Chart Structure: Improving

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Coffee futures in the September contract are hitting a four week low continuing its grinding bearish trend settling last Friday at 133.45 a pound while currently trading at 127.25 down 600 points for the trading week looking to break the contract low of 126.30 as I’ve been sitting on the sidelines in this market for several months as the trend is lower to neutral at the current time.

As I’ve stated in previous blogs I think coffee is forming a bottoming pattern and if I was a producer I think prices are cheap enough to start accumulating, however as a speculator I see no reason to enter into this market at the current time. Coffee futures are trading below their 20 and 100 day moving average telling you that the short term trend is to the downside, however the 10 day high as over 1000 points away risking about $4,000 from today’s price levels as that does not meet my criteria to enter into a trade so I remain neutral on this as I think the downside is limited in my opinion.

Many of the agricultural markets have rallied including sugar which is also grown in Brazil but we have large supplies of coffee at the current time as I don’t see any large price movement here in the short term as volatility remains relatively low especially for such a historically volatile commodity.
Trend: Lower
Chart Structure: Improving

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Weekly Crude Oil, Gold, Coffee and Sugar Markets Recap with Mike Seery

Our trading partner Mike Seery is back this week to give our readers a weekly recap of the futures market. He has been a senior analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.

Crude oil futures in the August contract are trading lower for the 3rd consecutive trading session currently trading at 58.87 a barrel while settling last Friday in New York at 59.97 down about $1 for the trading week still stuck in nonvolatile sideways trend despite the fact that prices hit a two week low in today’s trade as I’ve been recommending a short position for over a month and if you took the original trade continue to place your stop loss above the 10 day high at 61.81 risking around $3 or $1,500 per mini contract plus slippage and commission. Crude oil is trading below its 20 day but still slightly above its 100 day moving average as I’ve traded crude oil for 20 years and I can’t remember such a nonvolatile stretch like we’ve had in the last several months consolidating the giant move to the upside. The next breakout level is below 57.00 and if that level is broken prices could move sharply lower but that’s a big if as volatility is extremely low at the current time. Next week is the 4th Of July holiday weekend as I think volatility will remain low until Friday’s monthly unemployment report which could dictate the short term trend.
Trend: Lower
Chart Structure: Improving

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Gold futures in the August contract settled last Friday in New York at 1,202 while currently trading at 1,170 an ounce down about $30 for the trading week remaining incredibly choppy as I was recommending a short position getting stopped out in last week’s trade when prices bumped up against 1,200 as I’m sitting on the sidelines at the current time waiting for another breakout to occur and that could happen soon as prices remain very weak. Gold futures are trading below their 20 and 100 day moving average looking to break the critical 1,170 level and the second critical level is 1,160 if that level is broken I would have to think that the bear market is underway as I see no reason to own gold at the current time as all the interest is in the stock market which is right near all time highs. Gold only seems to rally due to the fact that Greece could possibly exit the Euro Zone and that’s why I got stopped out in last week’s trade. The chart structure in gold is outstanding but if prices do break I will be recommending a short position while placing my stop above the 10 day high which 1,205 risking around $35 or $1,200 risk per mini contract plus slippage and commission so be patient and wait for the breakout to occur.
Trend: Mixed
Chart Structure: Improving

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Coffee futures in the September contract are trading above their 20 but slightly below their 100 day moving average continuing its sideways trend settling last Friday in New York at 130 while currently trading at 136 as I do think prices have bottomed out around the 128 level, however prices have not hit a four week high so I’m waiting for a breakout to occur. The chart structure is improving dramatically as volatility remains relatively low as I do think a breakout to the upside is in the cards as prices hit a 2 week high in today’s trade as many of the agricultural markets have bottomed and are moving higher especially the grain market due to weather problems. The problem with coffee is the fact that we had huge production coming out of Brazil coupled with the fact that of a very weak Brazilian Real against the U.S dollar pushing many agricultural products that are grown in Brazil lower including orange juice, sugar and coffee in 2015, however everything comes to an end and it certainly looks to me that prices are going higher. I deal with many producers down in Brazil and in my opinion I would start to buy the actual cash coffee as I think prices are low enough but for speculators wait for the breakout which would be a 4 week high before entering which could happen in next week’s trade.
Trend: Mixed
Chart Structure: Excellent

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Sugar futures in the October contract settled last Friday at 11.55 a pound while currently trading at 11.92 up about 37 points for the week as I’ve been recommending a short position over the last month and if you took that trade continue to place your stop loss above the 10 day high which is just an eyelash away at 12.12 risking around 20 points or $220 dollars per contract plus slippage and commission as the chart structure is outstanding at the current time. Sugar prices hit a 6 year low as I remember in 2010 prices were trading around 35 rallying with many of the commodity markets due to quantitative easing as that’s how far prices have dropped as production numbers in Brazil are relatively high. Harvest is underway which generally creates a seasonal low at harvest time, however I’m a technical trader and I will continue to stick to the rules and place my stop at the 10 day high as overproduction over the last several years has sent prices to multi year lows and if we are stopped out then look at other markets that are beginning to trend.
Trend: Lower
Chart Structure: Outstanding

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Weekly Gold, Silver and Sugar Markets Recap with Mike Seery

Our trading partner Mike Seery is back this week to give our readers a weekly recap of the futures market. He has been a senior analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.

Gold futures in the August contract settled last Friday in New York at 1,172 an ounce while currently trading at 1,201 an ounce rallying sharply on rumors of a Greece exit possibly happening over the weekend sending prices sharply higher as I was recommending a short position from around the 1,170 level getting stopped out in yesterday’s trade losing around $30 or $1,000 per mini contract plus slippage and commission.

Janet Yellen and the FOMC committee did not raise interest rates earlier in the week sending gold sharply higher hitting a 3 week high but I still remain skeptical of this rally as a deal with Greece will occur in my opinion as the stock market still remains strong keeping money out of the gold market in the short term.

Gold prices have been trading sideways for quite some time breaking out a couple weeks back as this trade went nowhere until yesterday sending high volatility back into this market as I will sit on the sidelines and look at other markets that are beginning to trend as gold remains extremely choppy at the current time.

The U.S dollar is trading near a 6 month low and that’s propping up the precious metals in today’s trade as the next major level of resistance to the upside is 1,225 but I will wait for better chart structure to develop. Trend: Mixed
Chart Structure: Poor

What's Behind the "Big Trade"

Silver futures in the July contract settled last Friday at 15.82 an ounce while currently trading at 16.01 continuing its choppy trend right near critical support in my opinion as prices have not rallied much despite the fact that gold rallied $28 dollars in yesterday’s trade . I do believe if 15.40 is broken this market turns extremely bearish, however prices have rallied off that level many times so be patient and wait for the true breakout to occur as I’m sitting on the sidelines at the current time.

Silver futures are trading below their 20 and 100 day moving average telling you that the trend is to the downside, however I don’t like to trade choppy markets so be patient and wait for the chart pattern to improve while keeping a close eye on 15.40 because if that’s broken I think prices could head substantially lower as I don’t see any reason to own the precious metals at the current time.

The problem with the precious metals is the fact that U.S interest rates are on the rise coupled with the fact of a strong U.S dollar longer term as all the interest remains in the stock market which is still right near an all-time high so wait for the true breakout to happen.
Trend: Lower
Chart Structure: Poor

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Sugar futures hit a fresh 6 year low this Friday afternoon in New York currently trading at 11.12 a pound after settling last Friday at 11.72 closing right at session lows as I’ve been recommending a short position from 12.00 & if you’ve been following any of my previous blogs you understand that this trend is getting stronger as prices are trading far below their 20 and 100 day moving averages.

Sugar prices have traded lower 4 out of the last 5 trading sessions and if you took the original trade continue place your stop loss above the 10 day high which currently stands at 12.25 as the chart structure is poor at the current time due to the fact that prices continue to head lower on a daily basis.

Sugar production has been massive over the last several years sending large supplies onto the market coupled with the fact that the Brazilian Real is historically weak against the U.S dollar which continues to put pressure on sugar prices as I’m looking to add more contracts to this position once the chart structure improves and the risk/reward meets criteria which could happen in the next couple of days.
Trend: Lower
Chart Structure: Poor

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Our Next Call....Own this Sleeper Stock Before April 30th

We just got word from our trading partners at the International Speculator. Their message? "Own this sleeper stock that's running through April". The metals sector research team believes this will be the next high grade gold producer. If you want to make a fortune in the resource sector, all you need to know are the two times you should buy gold stocks.

The first: Invest in a gold mining company just before it makes a tremendous discovery.

Obviously, this is a daunting task. And without hands-on experience or a field research, you’d have better odds at winning roulette.

The second: Buy shares of a gold mining company just before it starts producing.

When a mining company announces its “First Gold Pour” is usually the only time it makes headlines, outside of a discovery. From that day forward, it’s a cash generating producer… and the value is no longer trapped in the rocks. That’s when the big money institutional investors take interest. Once they pile in, shares move very quickly.

Of course, there are very few new gold mines opening up in the world at any given time. So these opportunities are quite rare. But today, you have the chance to jump on one. We have found a deeply undervalued mining company with a high grade deposit 8x richer than the average mine.

Today, shares are cheap. But it’s scheduled to start pouring gold for the first time very soon—after that, shares could soar. In fact, Louis James, the chief metals and mining investment strategist at Case Research, believes this company could at least double in value.

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See you in the markets!
Ray C. Parrish
aka the Crude Oil Trader


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How Global Interest Rates Deceive Markets

By John Mauldin

 “You keep on using that word. I do not think it means what you think it means.”

– Inigo Montoya, The Princess Bride

“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

“Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

– From an 1850 essay by Frédéric Bastiat, “That Which Is Seen and That Which Is Unseen”

All right class, it’s time for an open book test. I’m going to give you a list of yields on various 10 year bonds, and I want to you to tell me what it means.

United States: 1.80%

Germany: 0.36%

France: 0.54%

Italy: 1.56%

UK: 1.48%

Canada: 1.365%

Australia: 2.63%

Japan: 0.22%

I see that hand up in the back. Yes, the list does appear to tell us what interest rates the market is willing to take in order to hold money in a particular country’s currency for 10 years. It may or may not tell us about the creditworthiness of the country, but it does tell us something about the expectations that investors have about potential returns on other possible investments. The more astute among you will notice that French bonds have dropped from 2.38% exactly one year ago to today’s rather astonishing low of 0.54%.

Likewise, Germany has seen its 10-year Bund rates drop from 1.66% to a shockingly low 0.36%. What does it mean that European interest rates simply fell out of bed this week? Has the opportunity set in Europe diminished? Are the French really that much better a credit risk than the United States is? If not, what is that number, 0.54%, telling us? What in the wide, wide world of fixed-income investing is going on?

Quick segue – but hopefully a little fun. One of the pleasures of having children is that you get to watch the classic movie The Princess Bride over and over. (If you haven’t appreciated it, go borrow a few kids for the weekend and watch it.) There is a classic line in the movie that is indelibly imprinted on my mind.
In the middle of the film, a villainous but supposedly genius Sicilian named Vizzini keeps using the word “inconceivable” to describe certain events. A mysterious ship is following the group at sea? “Inconceivable!”

The ship’s captain starts climbing the bad guys’ rope up the Cliffs of Insanity and even starts to gain on them? “Inconceivable!” The villain doesn’t fall from said cliff after Vizzini cuts the rope that all of them were climbing? “Inconceivable!” Finally, master swordsman – and my favorite character in the movie – Inigo, famous for this and other awesome catchphrases, comments on Vizzini’s use of this word inconceivable:

“You keep on using that word. I do not think it means what you think it means.”

(You can see all the uses of Vizzini’s use of the word inconceivable and hear Inigo’s classic retort here.)
When it comes to interpreting what current interest rates are telling us about the markets in various countries, I have to say that I do not think they mean what the market seems to think they mean. In fact, buried in that list of bond yields is “false information” – information so distorted and yet so readily misunderstood that it leads to wrong conclusions and decisions – and to bad investments. In today’s letter we are going to look at what interest rates actually mean in the modern-day context of currency wars and interest-rate manipulation by central banks. I think you will come to agree with me that an interest rate may not mean what the market thinks it means.

Let me begin by briefly summarizing what I want to demonstrate in this letter. First, I think Japanese interest rates not only contain no information but also that markets are misreading this non-information as meaningful because they are interpreting the data as if it were normal market information in a familiar market environment, when the truth is that we sailed beyond the boundaries of the known economic world some time ago. The old maps are no longer reliable. Secondly, Europe is making the decision to go down the same path as the Japanese have done; and contrary to the expectations of European central bankers, the potential to end up with the same results as Japan is rather high.

The false information paradox is highlighted by the recent Swiss National Bank decision. Couple that with the surprise decisions by Canada and Denmark to cut rates, the complete retracement of the euro against the yen over the past few weeks, and Bank of Japan Governor Kuroda’s telling the World Economic Forum in Davos that he is prepared to do more (shades of “whatever it takes”) to create inflation, and you have the opening salvos of the next skirmish in the ongoing currency wars I predicted a few years ago in Code Red. All of this means that capital is going to be misallocated and that the current efforts to create jobs and growth and inflation are insufficient. Indeed, I think those efforts might very well produce a net negative effect.

But before we go any farther, a quick note. We will start taking registrations for the 12^th annual Strategic Investment Conference next week. There will be an early bird rate for those of you who go ahead to register quickly. The conference will run from April 29 through May 2 at the Manchester Grand Hyatt in San Diego.

For those of you familiar with the conference, there will be the “usual” lineup of brilliant speakers and thought leaders trying to help us understand investing in a world of divergence. For those not familiar, this conference is unlike the vast majority of other investment conferences, in that speakers representing various sponsors do not pay to address the audience. Instead, we bring in only “A list” speakers from around the world, people you really want to meet and talk with. This year we’re going to have a particularly large and diverse group of presenters, and we structure the conference so that attendees can mingle with the speakers and with each other.

I am often told by attendees that this is the best economic and investment conference they attend in any given year. I think it is a measure of the quality of the conference that many of the speakers seek us out. Not only do they want to speak, they want to attend the conference to hear and interact with the other speakers and conference guests. This conference is full of speakers that other speakers (especially including myself) want to hear. And you will, too. Save the date and look for registration and other information shortly in your mail.
Now let’s consider what today’s interest rates do and do not mean as we navigate uncharted waters.

Are We All Turning Japanese?

Japan is an interesting case study. It’s a highly developed nation with a very sophisticated culture, increasingly productive in dollar terms (although in yen terms nominal GDP has not moved all that much), and carrying an unbelievable 250% debt to GDP burden, but with a 10 year bond rate of 0.22%, which in theory could eventually mean that the total interest expenses of Japan would be less than those of the US on 5 - 6 times the amount of debt. Japan has an aging population and a savings rate that has plunged in recent years.

The country has been saddled with either low inflation or deflation for most of the past 25 years. At the same time, it is an export power, with some of the world’s most competitive companies in automobiles, electronics, robotics, automation, machine tools, etc. The Japanese have a large national balance sheet from decades of running trade surpluses. If nothing else, they have given the world sushi, for which I will always hold them in high regard.

We talk about Japan’s “lost decades” during which growth has been muted at best. They are just coming out of a triple dip recession after a disastrous downturn during the Great Recession. And through it all, for decades, there is been a widening government deficit. The chart below shows the yawning gap between Japanese government expenditures and revenues.



This next chart, from a Societe Generale report, seems to show that the Japanese are financing 40% of their budget. I say “seems” because there is a quirk in the way the Japanese do their fiscal accounting. Pay attention, class. This is important to understand. If you do not grasp this, you will not understand Japanese budgets and how they deal with their debt.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: How Global Interest Rates Deceive Markets was originally published at mauldineconomics.com

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Yield Hungry Baby Boomers Are on a Death March

By Dennis Miller

Today’s forecast: yield starved investors forced into the market by seemingly permanent low interest rates will continue to be collateral damage. For some, that collateral damage may involve more than the loss of income opportunities… many could be wiped out completely.

At the Casey Research Summit last month, I asked the participants in our discussion group: “If there were safe, fixed income opportunities available paying 5 - 7%, would you move a major portion of your portfolio out of the market?”

They all answered a resounding, “Absolutely.”

Participants relying on their nest eggs for retirement income said they felt forced into the market for yield. Their retirement projections weren’t based on 2% yields, the rough rate now available on fixed income investments. They’d planned on 6% or so. What other choice do they have now?

The Federal Reserve knows seniors and savers are collateral damage. Former Fed Chairman Ben Bernanke has openly acknowledged that the Fed’s low interest rate policy is designed to prompt savers to take more chances with riskier investments. In their book Code Red, authors John Mauldin and Jonathan Tepper shine a harsh light on that policy, writing:

Central banks want people to take their money out of safe investments and put them into risky investments. They call it the “portfolio balance channel,” but you could call it “starve people for yield and they’ll buy anything.”

I have to agree with Mauldin and Tepper.

The collateral damage inflicted upon seniors and savers is twofold. First, it’s the loss of safe income opportunities. The Fed’s low interest rate policies have saved banks and the government an estimated $2 trillion in interest alone. $2 trillion added to the balances of 401(k) and IRA accounts would sure bolster a lot of desperate retirement plans.

But there’s no sign the Fed will reverse its low interest rate policies in the foreseeable future. So, yield starved investors, including throngs of baby boomers maturing into retirement age each day, play the market and risk their nest eggs in the process.

The Federal Reserve has succeeded in forcing savers to take billions of dollars out of fixed income investments to hunt for better yields. Take a look at the chart below showing the S&P 500’s performance since 2004. The Index has almost tripled since its 2009 bottom. There hasn’t been a major correction in well over 1,000 days.

When the bubble burst in 2007, the S&P took a 57% drop. I had friends just entering retirement who suffered 40-50% losses. Their stories are not uncommon, and some are now back at work—and not by choice.

This is the second form of collateral damage, and it can be much more devastating. It’s one thing to lose an income opportunity and call it collateral damage, but quite another to lose 50% or more of your life savings. If the market drops radically, as it did less than a decade ago, the life savings of many baby boomers could be destroyed.

No one knows when the next correction will occur. However, many pundits believe a major correction is due. Others say we can continue on the same track, much like Japan has done for 25 years. Here’s what we do know: the Fed has made it clear that it plans to hold interest rates down for quite some time.

When you invest money earmarked for retirement, you risk trying to time the market. Even seasoned investors would be foolhardy to think they’ll have enough time to easily exit their positions and lock in gains.

It never works that way.

Now is the time for caution. Whether you’re a do it yourself investor or work with an investment professional, it’s a good time for a complete portfolio analysis with an eye on this question:

What happens to my portfolio if the market completely collapses?

There are concrete steps you can take to avoid catastrophic collateral damage. Sticking to firm position limits, diversifying geographically (including international holdings), non correlated assets, setting trailing stop losses, and holding short-duration bonds come to mind.

Be wary of any advisor touting the “buy and hold” philosophy. They’d point to the chart above and note that the market went from 700 to 1,900+ in five years. If investors are patient, it will come back after the next drop. Unfortunately, seniors don’t have time to sit around and wait.

No one can guarantee the market will rebound as quickly as it did in the last decade. It’s not the “buy” in “buy and hold” that concerns me. There are excellent companies out there that pay healthy dividends and will rebound relatively quickly. Depending on your age and financial condition, it’s the indefinite holding that could be a problem.

If you’re not comfortable holding an investment for a decade or more, consider using a stop loss. After all, would you rather suffer a major loss and hope against hope that the market rebounds fast, or be proactive and keep your nest egg intact?

The best way to avoid becoming collateral damage is to take safety precautions before the next big, bad event takes place. One easy (and free) way to start strengthening your financial know how is to read our e-letter, Miller’s Money Weekly. Each Thursday my team I cover hot button financial topics and share the tools income investors need to live rich in today’s low yield world.

Click here to begin receiving your complimentary copy today.

The article Yield Hungry Baby Boomers Are on a Death March was originally published at millers money

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