The 'Great Unwind' Arrives
The 'great unwind' arrives... The Fed will begin to 'taper' next month... Can the economy continue to grind higher without support? We'll soon find out... 'Guardrail your portfolio against a market shock and simultaneously position it for more upside'... A special invitation for next week's Stansberry Conference attendees...
The 'great unwind' is here...
After months of speculation, the Federal Reserve formally made the announcement yesterday... It will begin to "taper" its $4.5 trillion balance sheet next month. As the Wall Street Journal reported...
The Federal Reserve indicated Wednesday... it would begin shrinking its portfolio of bonds next month, starting to close the books on an unprecedented and sometimes controversial policy experiment...
Beginning in October, the Fed will end its practice of fully reinvesting the principal payments of maturing into new bonds and instead allow $10 billion in holdings to roll off without reinvestment every month. Those amounts will increase by $10 billion each quarter to a maximum of $50 billion.
The central bank also said it expects to raise rates at least one more time this year. And Fed chair Janet Yellen used the occasion to confirm that the era of "easy money" is ending. More from the Journal...
"The basic message here is U.S. economic performance has been good," Fed Chairwoman Janet Yellen said at a press conference after a two-day policy meeting that ended Wednesday. "The American people should feel the steps we have taken to normalize monetary policy... are well justified given the very substantial progress we've seen in the economy... "
Ms. Yellen said there was a "high bar" to resume reinvestments, and the Fed would only do so in the event of a "significant shock that's a material deterioration to the outlook." She didn't outline any circumstance under which the Fed would accelerate the runoff.
As regular Digest readers know, we remain skeptical...
The Fed and other central banks have thrown the monetary "kitchen sink" at the global economy... yet growth remains tepid at best. The inflation they've been so desperate to create has yet to show up.
Despite their rhetoric, even the Fed doesn't know what will happen as it begins to remove this unprecedented stimulus. Maybe they're right... Maybe the economy will continue to grind higher even without support.
We believe their confidence is misplaced... And we're apparently not alone. Strategists at Deutsche Bank believe Fed tightening – the beginning of what they've called "the great central bank unwind" – could ultimately trigger the next financial crisis. From their recent report titled "The Next Financial Crisis"...
When looking for the next financial crisis, it's hard to escape from the fact that we're seemingly in the early stages of the "great unwind" of global monetary stimulus at the same time as global debt remains at all-time highs following an increase over the past decade – at the government level at least – which has been unparalleled in peacetime history...
You slowly become anchored to believe the current situation is normal as it's persisted for so long now. However, it's anything but normal. Since the financial crisis, $10 trillion plus has been added to the balance sheets of the four largest central banks with over $14 trillion of assets now owned.
The following chart puts those figures in startling perspective...
But the analysts also note that even this chart doesn't tell the full story...
If you also add in the record growth in government debt in the U.S., U.K., eurozone, and Japan, you get a total monetary and fiscal stimulus of nearly $34 trillion since the financial crisis. And what do we have to show for it? More from the report...
In the end, $34 trillion of stimulus and [quantitative easing] has delivered only very low growth, subdued inflation, and sky-high asset prices around the globe. This is unprecedented territory and how can anyone estimate what the fallout will be when we normalize again?...
History would suggest there will be substantial consequences of the move especially given the elevated level of many global asset prices... [Even] if the unwind stalls as either central banks get cold feet or if the economy unexpectedly weakens, we will still be left with an unprecedented global situation, and one which makes finance inherently unstable even if we are currently living in the lowest volatility markets on record.
They also worry that if this unwind fails, central banks will be left with little of their usual "ammunition" to stimulate again. Like us, Deutsche Bank fears we could see even more extreme measures next time around...
Could the next recession be the one where policy makers are the most impotent they've been for 45 years or will they simply go for even more extreme tactics and resort to full on monetization to pay for a fiscal splurge? It does feel that we're at a crossroads and the next downturn could be marked by extreme events given the policy cul-de-sac we seem to be nearing the end of.
Again, none of this means a crisis is certain or imminent...
And it's certainly not a reason to sell all your stocks and move to a bunker. This long bull market has defied critics for years, and it could easily continue to climb the "wall of worry" now. But we'd be foolish not to acknowledge the risks.
For now, we remain cautiously bullish...
Stay long, but continue to watch your trailing stops. And if you're heavily long the market today, consider "hedging" a bit.
Depending on your circumstances, this might mean shorting a handful of stocks, buying a few long-dated put options (as we've detailed in Stansberry's Big Trade), or simply holding more cash.
You might also be interested in learning more about the options strategies of our colleague Dr. David "Doc" Eifrig...
As we mentioned earlier this week, Doc has just published some brand-new research tailor-made for today's market environment. In it, Doc explains some simple and easy-to-understand strategies designed to protect your portfolio from a sudden crash or bear market, while simultaneously positioning it for more upside if the bull market continues.
Doc has prepared a short presentation explaining it all... including how you can take advantage of a special, limited-time offer to try these strategies out for yourself. But if you're interested, we must hear from you by midnight Eastern time tonight. Click here for all the details.
We're closing today's Digest with a note from Gray Zurbruegg, president of The Atlas 400...
As you'll see below, he has a special announcement for subscribers who will be joining us in Las Vegas next week for the 2017 Stansberry Conference & Alliance Meeting at the Aria Resort & Casino. Here's Gray, who heads The Atlas 400 private-wealth club Porter founded eight years ago...
Interested in The Atlas 400? Want to travel the world with interesting people, doing extraordinary things?
Would you like to meet and speak with 25 of our current members?
If so, your chance is just around the corner.
Join us for a cocktail reception at the Lift Bar in the Aria Resort & Casino, following the Stansberry Conference on Thursday, September 28, 2017.
And please, only come if you're seriously interested in membership.
There's a substantial initiation fee to join ($30,000), and our excursions aren't cheap. But if you're at a point in your life where meaning is paramount and you're in a position to enjoy the fruits of your labor, then we look forward to meeting you.
If you'd like to join us for a cocktail, please e-mail or call me directly at (410) 864-0878.
New 52-week highs (as of 9/20/17): AMETEK (AME), Boeing (BA), Bristol-Myers Squibb (BMY), Berkshire Hathaway (BRK-B), Celgene (CELG), CME Group (CME), WisdomTree Japan Hedged Equity Fund (DXJ), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), iShares MSCI Japan Fund (EWJ), iShares China Large-Cap Fund (FXI), iShares U.S. Aerospace and Defense Fund (ITA), JPMorgan Chase (JPM), Monsanto (MON), AllianzGI Equity & Convertible Income Fund (NIE), Procter & Gamble (PG), Koninklijke Philips (PHG), PNC Financial Warrants (PNC-WT), ALPS Medical Breakthroughs Fund (SBIO), ProShares Ultra S&P 500 Fund (SSO), Stanley Black & Decker (SWK), ProShares Ultra Financials Fund (UYG), Verisign (VRSN), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).
In today's mailbag, lament for the "death of retail"... feedback on Steve's government bond warning... and a longtime subscriber shares his experience with Stansberry Research. Send your notes to feedback@stansberryresearch.com. We can't respond to every email – and we're unable to provide individual investment advice – but we read them all.
"Good Day, I for one enjoy going to the mall. I rarely buy anything online. I like to see/feel/touch the items I buy. Some items I've purchased online where not as I thought they would be. I also enjoy going to the grocery stores.
"Going [shopping is] a social experience for me as well. I see friends, neighbors at these places. Talking to people is important to me. I fear we are becoming too attached to technology and detached from being human beings. By the way, I've worked in IT for over 30 years. Thanks." – Paid-up subscriber Steve Scaffa
"That's what I call, 'Going Broke Safely.' If an investment makes less than the rate of inflation, it means you need a different strategy or you are guaranteed to loss wealth. Good article!" – Paid-up subscriber Martin Axford
"Hi, good rundown on risk of gov't bonds. Would be helpful if you would specify if that includes short term (<one-year maturity) treasuries as well. Many 401ks don't have a money-market fund so treasuries are the 'safest' available. I'm sure many folks, especially those nearing retirement, would not be comfortable putting their entire 401k in equities at this point. What would you recommend to them instead if they have no 'cash' option? Thanks!!" – Paid-up subscriber Boodi B.
Brill comment: While Steve's warning technically applies to all government debt, Treasury bills (which have maturities of one year or less) – and particularly those with maturities of 90 days or less – can safely be considered "cash" in most circumstances.
Again, we're prohibited from providing individual advice... But in general, in accounts where holding cash directly isn't possible, we recommend holding U.S. Treasury bills or the shortest-duration U.S. Treasury fund option available in your plan.
Of course, even holding cash isn't without risk... which is why we also recommend everyone own some gold and silver as a hedge.
"I wanted to advise that I am up an average of 27% this year as a result of following your recommendations. Everything I have invested in is a Stansberry Research recommendation.
"Collectively, I refer to your editors as my gurus. I look at each publication and choose investments that seem right for me, with the added comfort of knowing that whatever I pick it is a guru's pick. I also know that I'll be advised when it is time to get out of a position, because not even the gurus bat 1,000, although they come pretty close. After making a purchase, I watch my position sizing, and try to balance the portfolio between income investments, strong companies that are likely to weather the coming financial storms, a few hedges from Stansberry's Big Trade and Stansberry Gold and Silver Investor, and a few modest speculations.
"This is all fairly elementary, but I am writing in response to all those who write in offering to rip my gurus some new orifices. It appears many of the unhappy campers are not reading the newsletters and as a result are not following position sizing recommendations and not spreading their risk around, and likely letting emotions rule their portfolios.
"I improved my returns simply by not going all in on single investments, not getting out too soon, and not staying in too long. In sum, I don't second guess some pretty smart folks at Stansberry Research. It's a wise man who recognizes his own limitations and follows good advice. That may make me sound dumb or bovine-like. So be it. I'm bleating all the way to the bank." – Paid-up subscriber Larry Vanore
Brill comment: Thank you for the kind words, Larry. It's always a pleasure to hear from subscribers who "get it," and we're thrilled by your success.
Regards,
Justin Brill
Baltimore, Maryland
September 21, 2017