The 'Bond King' Is Now Shorting Bonds
The 'Bond King' is now shorting bonds... Defaults hit a five-year high... The next bust in real estate?... Big news for Apple shareholders...
Bill Gross – the co-founder and former Chief Investment Officer of bond giant PIMCO – has now turned bearish on the credit markets.
In a recent interview with Bloomberg, Gross said he expects corporate bonds to fall because they've soared too far, too fast since the market bottomed in February. He also believes the day is coming when central banks will no longer be able to "prop up" asset prices.
Gross recommends avoiding credit risk, which he says means "not buying stocks" and "not buying high-yield bonds." Incredibly, he says he's also trying to short the credit markets for the first time in his career, but is finding it difficult. From the interview...
It's really hard to change your psychological makeup and to be a hedge manager that is comfortable with being short. I'm working on it, because I'm an investor that ultimately does believe in the system, but believes that the system itself is at risk.
It's not surprising he's uncomfortable betting against the bond market...
Gross built his reputation and his personal fortune buying bonds during one of the biggest bull markets in the history of the credit markets.
But it is notable that he believes so strongly that the long bull market is ending, that he's betting against it anyway.
Today, he went even further...
In his latest monthly letter, published this morning, Gross said the historic rally isn't just ending... it was a massive debt-fueled "black swan event" that we may never see again. From the letter...
For over 40 years, asset returns and alpha generation... have been materially aided by declines in interest rates, trade globalization, and an enormous expansion of credit – that is, debt. Those trends are coming to an end if only because in some cases they can go no further.
Those historic returns have been a function of leverage and the capture of "carry," producing attractive income and capital gains. A repeat performance is not only unlikely, it is impossible unless you are a friend of Elon Musk and you've got the gumption to blast off for Mars. Planet Earth does not offer such opportunities.
If you've been following the action over the past few months, you might believe the credit fears that roiled markets last fall have passed... and the economy is doing just fine.
Like Porter, Bill Gross disagrees...
In related news, ratings agency Standard & Poor's reported that the default rate on speculative-grade debt continues to rise...
S&P says the default rate in May hit 4.1%, the highest level in nearly six years. It also notes the credit-downgrade ratio – the number of downgrades compared with upgrades – continues to grow.
The firm upgraded 27 companies representing $78 billion last month, but downgraded 64 companies representing more than $150 billion. As S&P analyst Diane Vazza noted to Bloomberg...
The resulting downgrade ratio for the month by count is 2.37 to 1. In comparison, the downgrade ratio was 2.18 to 1 for full-year 2015, 1.02 to 1 for full-year 2014, and 0.89 to 1 for full-year 2013.
Meanwhile, we're beginning to see some red flags in the real estate market, too...
Some of the biggest beneficiaries of every credit boom are so-called "trophy assets" – things like high-end real estate, yachts, planes, and fine art – prized by the super-wealthy.
That's not a surprise... These folks own the most assets, so they make the most money when asset prices rise. All that money has to go somewhere.
As demand rises, prices can soar... which then brings new supplies to the market. Sooner or later, the "boom" turns to "bust"... supplies dwarf demand... and prices collapse.
Several recent reports suggest the latest bust may have already begun...
The New York Times reports the number of $100 million homes for sale just hit a record.
According to Christie's International Real Estate, there are now an incredible 27 properties on the market with nine-figure prices.
That number has more than doubled in the past two years. Worse, if you add in private listings, the number could actually be as high as 40 or 50. As Jonathan Miller, president of appraisal and research firm Miller Samuel told the Times...
When you have a record number of homes for sale at a price point of $100 million or more, that tells you these homes aren't selling. It's not as deep a market as some might hope.
A similar "glut" is developing in the luxury-condo market in Miami. As Bloomberg reported this week...
Miami's crop of new condo towers, built with big deposits from Latin American buyers and lots of marketing glitz, are opening with many owners heading for the exits.
A third of the units in some newly built high-rises are back on the market, though most are listed for more than their owners paid in the pre-construction phase. At the current sales pace, it would take 29 months to sell the 3,397 condominiums available in the downtown area, according to South Florida development tracker CraneSpotters.com.
With the U.S. dollar strong, South American investors who piled into the downtown Miami market after the real estate crash are now trying to unload their recently built condos, adding inventory to an area where 8,000 units are under construction and nine towers were completed since the end of 2013.
Some are offering homes at a loss as demand cools. Condo purchases from January through April slid 25% from a year earlier, while the average price fell 6% on a per-square-foot basis, CraneSpotters data show.
Longtime readers may recall we followed similar stories a decade ago before the housing market collapsed. While we believe prices for high-end real estate could fall significantly from here, we don't expect a replay of the last crisis.
The housing crash was fueled by massive amounts of mortgage debt... The financing in this real estate boom was much less aggressive. In Miami, for example, many projects required cash deposits of as much as 60%.
So another all-out collapse in real estate is unlikely. Instead, we could simply see a glut of unowned "zombie" homes for some time.
Finally, we'll end on some potentially big news for Apple (AAPL) investors...
Regular Digest readers know several Stansberry Research analysts are bullish on the consumer-electronics giant. In short, the stock is so cheap today that it doesn't really matter if the company's growth is slowing dramatically.
But according to new research from analysts at BMO Capital Markets, Apple could surprise almost everyone and return to growth this year.
In short, the analysts noted that Apple now has the largest base of existing iPhone users it has ever had... and a record 25% of those users now have iPhones that are at least two years old. History shows these folks are likely to upgrade when the next version of the iPhone – in this case, the iPhone 7 – is released.
According to these numbers, Apple could sell more than 75 million units of the iPhone 7... a new all-time sales record.
New 52-week highs (as of 6/1/16): Lundin Gold (LUG.TO) and Ritchie Bros. Auctioneers (RBA)
Nothing much in the mailbag today. Have a question for one of our analysts? Drop us a line at feedback@stansberryresearch.com. (Remember, we're prohibited from answering individual investment advice.)
Regards,
Justin Brill
Baltimore, Maryland
June 2, 2016
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