Saturday, February 13, 2016

Economic Review

It's been a crazy week for sure. If you have been checking your investment accounts I'm sure most people have been wondering what the heck is going on in the world all of the sudden. The last 6 months have not been an investors best friend. The last month even worse. Just about everyone has an account that is lower in value. Whether we remain at the beginning of something much larger like a depression or steep recession one needs to keep an eye out for opportunity when it presents itself. So stayed disciplined and focused on the long term view. When asset prices become cheaper it's usually a good time to buy. If you have cash to invest now would be a good time to partition buys on down days. Don't use all your dry powder at once as that would not be prudent, but maybe take 10-15% for a buy and at least a few more weeks to see where things keep going before putting in another 10-15%. No need to go all in just yet as we wait for everything to shake out and buy assets at low prices when they present themselves. Foreign currency swings are causing some of the volatility in US stock prices as their earnings become affected.

Some interesting things to note. The Bank of Japan had announced recently it would be turning to negative interest rates. That' right you now have the privilege of lending your money to the Japanese Government in return for getting less money back. What a deal! Oddly the Yen has strengthened against the dollar and some other currencies which runs opposite to economic theory.

When something like this happens we need to pause and reflect on why that is. For one when a central bank pledges negative rates it means they are trying to stimulate people to spend their money instead of saving it for a rainy day(Japan has been trying to stimulate its economy into growth for awhile now as it's a nation of savers). It's one of the weapons of last resort to stop a deflationary trend from gaining steam. Europe is instigating the same policies playing a role with worldwide cash racing around violently to find somewhere to park. Ironically Japanese debt is considered a safe haven along with the US dollar. So despite the known negative interest rates investors are willing to escape that small loss in order to avoid potentially bigger ones they foresee in other places. The short term swings in currency markets will probably continue to be violent. Either way my guess is this money is all fleeing Europe and other emerging market countries with high debt loads. Considering the Federal Reserve has asked banks to consider negative rates in it's stress test for 2016 it makes me wonder what else is afoot that we aren't fully aware of yet. Central bankers are assuredly worried. It's just not clear if they can stop people from deciding to hoard money instead of spend as they fear the future. My choice would be they cannot as the collective will of the people always prevails when the real issue is the collapse of confidence in government.

Gold has also finally rallied after 5 years of declines. It has nothing to do with inflation or negative rates. It all has to do with trust(see above paragraph). There is considerably less trust towards world governments right now as more people see longer term there is no way out of many situations. Gold is the hedge against fear and government. Not inflation or money supply increases. If that were true gold would have rallied during the Fed's quantitative easing programs, and the ECB's We could be seeing the metal trade sideways in a new range, or watch it retest lows and define new support areas. After a 50% decline from the highs we must watch if the metal gives clues to its direction.

Government bond yields have reached lows again. Especially the USA. I'm not sure who in their right mind would lend money to the government for 10 or 30 years at less than 1.75% and 2.5%. Oh wait the Federal Reserve was the biggest buyer of those bonds the last few years. No surprise since every other smart person realized it was a bad idea. Congress couldn't manage a lemonade stand right now.  It is possible that this could be an erroneous flight to quality in government bonds. This could be trapping millions of investors creating a bubble when confidence fully collapses and bond yields sky rocket higher. Banks would be especially vulnerable as its written into law to hold government debt for capital requirements. It is totally possible for a bubble in bonds, especially government debt, to unfold.  Worldwide major governments are near the top of their borrowing ranges. When a major country defaults I think all hell will break loose. It's only a matter of time according to history.

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