Faber on a bond market collapse...
Faber on a bond market collapse... A huge shift in the market... The reason home prices are up 10%... Steve's top idea for 2013...
In case you were feeling too optimistic today, our friend Marc Faber has some grim thoughts to share...
Longtime Digest readers are familiar with Marc and his ideas. Marc is a globetrotting contrarian investor, who always has a unique take on the markets. He's a constant member of Barron's prestigious "Round Table" discussions. He was a guest on Stansberry Radio back in March (listen to the episode here). Because of his often bearish stance, he's referred to as "Dr. Doom."
Last weekend, Barron's published an interview with Faber. It's worth a read. Faber echoes Porter's thoughts on how central bank money-printing programs will eventually produce a catastrophe. Faber expects it to end with social upheaval, a stock market collapse, and a war on the rich. Faber says...
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At some point, there will be a big reset. In the democracies of the Western world, large numbers of people will vote against the well-to-do. Throughout history, minorities have been targeted. Now the rich will be targeted through some kind of wealth tax or significantly higher tax rates. Eventually there will be so much antagonism against well-to-do people that it won't be comfortable. |
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Also, geopolitical conditions could deteriorate badly in the Middle East and Asia. America's reset toward Asia has alarmed the Chinese, who won't tolerate U.S. interference long term in the region. Then, there's the possibility of a Black Swan event. If the S&P 500 drops 20%, the Fed will print more money, so that's not a huge downside risk. But the bond market could collapse, inflation could accelerate, or the Chinese economy could implode. Or we could have a destabilizing political event, or a pandemic. |
Faber is preparing for the "doom" he sees coming by staying diversified with precious metals, cash, stocks, and real estate. You can read the full interview here.
We agree with Faber. The grand money-printing experiment will end badly. But as we detailed many times, the perceived "good times" can last for years. In fact, we are at what is likely an important new phase of the cycle.
The market believes Fed Chairman Ben Bernanke has solved the world's problems. Construction spending, manufacturing, and private employment are gradually improving. Bond yields are rising (because of expectations that a stronger economy will raise demand for credit).
We're also seeing an important change in market psychology. In early 2012, we predicted that money would flock to the safest dividend-paying blue chips, like Johnson & Johnson and Procter & Gamble. These are the safer "defensive" names money managers buy when they are wary of the broad market and a struggling economy.
Our prediction was right on. Stable blue-chip dividend-payers have soared. Johnson & Johnson climbed from $65 per share to $88 today. Procter & Gamble climbed from $65 per share in mid-2012 to $82 today.
But in the past few weeks, we're seeing the "defensive" blue chips decline... and "growth oriented" companies like Ford Motor Co. do well. A rotation of money is taking place. Below is a chart that displays the returns of Johnson & Johnson, Procter & Gamble, and Ford over the past two weeks. As you can see, the defensive blue chips have declined... while Ford has surged more than 10%.
This change in market psychology signals a growing interest in equities that benefit from economic expansion. It signals the market is growing more comfortable with the idea that Bernanke has fixed everything (even if the fix is temporary). Look for Ford and other manufacturers of goods to do well.
Also doing well: Real estate markets targeted by billions of dollars from Wall Street.
The New York Times reports how giant investors, like private-equity firm Blackstone Group, are scouring America in search of cheap housing. With billions of dollars to manage and few assets offering safe yields (bonds certainly are not), Wall Street firms are buying huge numbers of homes and renting them out. The Times reports:
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Blackstone, which helped define a period of Wall Street hyperwealth, has bought some 26,000 homes in nine states. Colony Capital, a Los Angeles-based investment firm, is spending $250 million each month and already owns 10,000 properties. With little fanfare, these and other financial companies have become significant landlords on Main Street. Most of the firms are renting out the homes, with the possibility of unloading them at a profit when prices rise far enough. |
Regular readers are familiar with this trend. Steve Sjuggerud has been bullish on housing for nearly three years. He's written dozens of pieces urging readers to buy cheap real estate. And Blackstone has been one of his top recommendations for the past six months. Blackstone is a huge asset manager that has become one of the country's largest home buyers.
Large home buyers (like Blackstone) and low interest rates are major reasons why U.S. home prices increased 10% from March 2012 to March 2013. Steve expects more price increases... and more gains for Blackstone shareholders. The stock is up 61% since November for True Wealth readers. Despite the big share price gain, the stock yields more than 5%. Income-seeking investors should drive shares much higher.
Another top idea from Steve is buying Japanese stocks. Steve called Japan "The No. 1 Opportunity of 2013." Steve's bullish case rested on the newly elected Abe administration printing enough money to produce a huge rally in Japanese stocks.
Shortly after Steve's call in late December, Japan's benchmark stock index, the Nikkei, soared 55%. But as you can see from the chart below, the big Nikkei rally has suffered a major correction. The index has declined 14% in just the past few weeks.
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Steve isn't surprised by the selloff. He notes that after such a big rally, it's only reasonable for Japan to give back some of its gains. He expects Japanese stocks to climb much higher after this correction is finished.
New 52-week highs (as of 6/4/13): Target (TGT) and iShares Lehman Bros 20+ Year Fund (TLT).
In today's mailbag, a couple subscribers write in with thoughts on what the world thinks of the dollar... Send your comments to feedback@stansberryresearch.com.
"I'm here in Mexico City June 2013 and staying at one of the nicest hotels. I went to the front desk to exchange some green backs and was shocked. They limit the amount you can exchange to $50. That's not $50 per day but $50 per stay.
"When I asked why they said it was the law and that only currency exchange offices can exchange larger amounts. You can't even go to a bank and get pesos for dollars. We are falling and falling fast." – Paid-up subscriber Doug P.
"I think I have China figured out. What they are doing is buying producing assets (mines, oil wells, etc). What would you rather have, 1.5 trillion in money in the bank currently losing value, or 1.5 trillion in productive assets?" – Paid-up subscriber Eric
Regards,
Brian Hunt
Delray Beach, Florida
June 5, 2013
What happens to our cash if the correction doesn't come...
I (Porter) recently began advising subscribers to start building their cash positions... paring their stock portfolio down to include shares of only the highest-quality businesses (bought at great prices). And I've recommended they hold that "cash" in a 50-50 split between 90-day Treasury bills and gold.
The reason is, I believe a market correction is on the horizon. And the guy with liquidity at the bottom is king...
I bought a lot of stocks in 2009 and 2010... after the market had plummeted and lots of high-quality stocks could be bought at a bargain. I was able to do that because I was one of the few people who had raised cash in 2007, when the market was still soaring.
I think the situation is similar right now. I think it's time to begin selling. That doesn't mean to indiscriminately sell everything. But if you hit a trailing stop or decide to take profits on a position... use that to increase your cash position. You should always have about 10% of your assets in cash. But I would try to end this year with around 50% in cash.
But what if that correction doesn't hit right away? After all, the central banks have shown a commitment to printing more and more money for as long as they can... What if stocks go up another 20% before the end of the year? Well, great. You're going to be selling into that strength. You'll make a lot of those profits.
And what if a major correction is still a couple years off... if the stock market continues to go crazy next year and stocks go up another 20%? Instead of making 20%, you're only going to make about 10%.
Also remember... I'm not suggesting that you go completely to cash right now. I'm saying that by the end of the year, you should end up with a portfolio of about 50% stocks and bonds and 50% cash. So you'll still participate in a rising market. But you'll also be protected when things start to break down...
I believe that the bond market is completely rigged and manipulated by the Federal Reserve right now. And that manipulation is doomed to fail.
Look at a normalized interest rate on bonds. If you were to take the long-term average interest rate on U.S. 10-year Treasury bonds, you'd come back with a number that's around 4.9%. If the 10-year Treasury bond was at nearly 5% instead of less than 2%, where would the price of stocks be? You should think in those terms because things are going to be normalized. Reversion to the mean is not dead...
And I think many people who are loading up on stocks with the belief that interest rates are going to be permanently low will at some point be extremely disappointed.
– Porter Stansberry with Sean Goldsmith
What happens to our cash if the correction doesn't come...
Porter has been advising subscribers to start building cash, anticipating a significant market downturn. But what happens to that position if the market continues soaring?
In today's Digest Premium... Porter explains how his position will perform (and profit) in a rising market...
To continue reading, scroll down or click here.
What happens to our cash if the correction doesn't come...
Porter has been advising subscribers to start building cash, anticipating a significant market downturn. But what happens to that position if the market continues soaring?
In today's Digest Premium... Porter explains how his position will perform (and profit) in a rising market...
To subscribe to Digest Premium and access today's analysis, click here.