The One Certain Winner in Next Week's Election
Bad news for Hillary... HSBC: The one certain winner in next week's election... Investors have been rushing into bonds... Is the bond-market collapse about to begin?... How to profit while others panic... Don't miss Porter's latest interview... P.J. O'Rourke: The most important question in America today...
New polls show Trump is gaining...
Yesterday, we mentioned that the market says a Donald Trump presidency may be more likely than many imagined.
As we noted, the S&P 500's performance between July 31 and October 31 has correctly predicted the outcome of 86% of U.S. presidential elections since World War II. This year, it fell 2.2% over that time, which suggests Trump will win.
Now, it appears mainstream polls may be starting to agree...
A national ABC News/Washington Post poll released this morning showed Trump and Hillary Clinton are now in a dead heat, with each garnering support of 46% of likely voters. This is a dramatic shift from as recently as October 23, when the same poll reported a 50%-38% split in favor of Clinton.
Notably, the poll also showed Clinton is now seen by likely voters as less "honest and trustworthy" than Trump for the first time in this year's campaign.
"Buy gold no matter who wins"...
According to James Steel, chief precious metals analyst at HSBC Bank, the one certain winner in next week's election is gold.
While he believes a Trump victory would be "more supportive" for gold, he thinks gold could jump to new three-year highs above $1,400 per ounce regardless of who wins. As Bloomberg reported this morning...
Both candidates have espoused trade policies that could stimulate demand, with gold offering a potential "protection against protectionism," he says...
If the real-estate magnate triumphs, gold could rise to $1,500 an ounce, according to HSBC, up from around $1,289 at 10:55 a.m. in New York. If Clinton wins, the price of the metal could improve to $1,400 an ounce by year end, Steel writes, adding that a Democratic sweep of Congress would further stoke demand for the metal owing to a possible boost in fiscal spending.
Clinton's not alone in having suggested stimulus through channels outside of monetary policy, with Trump at one point saying he would put at least half a trillion dollars to work.
Regular readers know we believe the recent correction in precious metals could have a little further to go. But we remain incredibly bullish for the long term... And next week's election is simply one more reason to believe much higher prices are likely over the next several years.
Again, if you've already taken our advice, you can afford to wait for confirmation that the correction has ended. But if you don't yet own enough gold and silver, it's a great time to start building a position.
Investors have been rushing into bonds...
If you've been with us for long, you also know the world has been binging on debt like never before.
The International Monetary Fund reported last month that total non-financial-sector debt has ballooned to an all-time record of $152 trillion... while the global debt-to-GDP ratio has also soared to an all-time high of 225%, up from 200% just 14 years ago.
Worse, we're seeing record debt at the government level, the corporate level, and the consumer level (via auto and student loans in particular). The boom in corporate borrowing is especially concerning...
U.S. companies have already borrowed $1.4 trillion this year to date, according to data firm Dealogic. This is on pace to shatter last year's previous all-time record of $1.5 trillion. Unfortunately, most are using this money to refinance existing loans... buy back stock and pay dividends... and finance expensive (and often questionable) mergers and acquisitions. This will do little to help the economy. But it greatly increases leverage... and risk.
As we've explained, these foolish moves have been facilitated (some might even say encouraged) by unprecedented central-bank stimulus. Record-low interest rates and massive quantitative-easing programs have slashed corporate borrowing costs. They've also pushed down government bond yields and made higher-yielding corporate debt relatively more attractive.
But if new research from Citigroup Chief U.S. Equity Strategist Tobias Levkovich and the bank's "fund flows" team is any indication, they've also been fueled by jaw-dropping investor demand for bonds – or more specifically, bond funds and exchange-traded funds (ETFs) – this year. From the report (courtesy of the Reformed Broker blog)...
YTD through September, bond funds have experienced inflows of $123.45 billion, significantly better than the $2.20 billion inflow garnered over the same nine-month period in 2015...
Fascinatingly, combined bond-fund inflows in the first nine months of 2016 year to date were more than four times the inflows over the same time period in 2015.
The report shows corresponding year-to-date outflows of $73 billion in equity mutual funds and ETFs and $82 billion in money-market funds.
In other words, investors have been pulling money from stock and money-market funds and rushing into bond funds like there's no tomorrow. And they've done this at a time when the risks in bonds have never been higher.
Worse, many investors are compounding these risks in funds that are even more dangerous than the market at large. As Porter explained in the October 7 Digest...
The big secondary risk from the corporate defaults we're expecting are huge liquidity challenges that will be faced by corporate bond funds and exchange-traded funds.
Nobody is even thinking about this yet, but it's completely insane to offer daily or weekly liquidity (ETFs, mutual funds) for an asset class (junk bonds) that routinely "seizes up." Hundreds, if not thousands of bonds will simply not trade for months or years because buyers and sellers won't agree on a fair price. Huge sums of capital are invested in corporate-bond funds today... and these investors all believe they will be able to get out in time. They won't.
If you do nothing else with our work on these topics, at the very least make sure you don't own any junk-bond funds or mutual funds – or any funds that are even allowed to buy these kind of assets. They're going to get smoked. And investors won't be able to get any of their money back. They'll be trapped for the entire downturn. (See what happened to Third Avenue's Value Credit Fund last year for an example of what I mean.)
Is the bond-market collapse about to begin?
But last week, something may have changed...
Bonds sold off from their recent highs as interest rates rose... And investors dumped bond funds like never before. As the Wall Street Journal reported on Monday...
Investors pulled $2.2 billion from all junk bond ETFs last week, the most in six weeks, according to XTF, a market analytics firm.
Nearly half of that sum came from just one ETF on a single day: $998 million flowed out of the iShares iBoxx High Yield Corporate Bond ETF (HYG) last Thursday, a record one-day withdrawal for the oldest and largest junk bond ETF, according to BlackRock, the ETF's provider.
Investment-grade bonds weren't immune either. Investors pulled $1.7 billion from the iShares iBoxx Investment Grade Corporate Bond ETF (LQD), the biggest weekly outflow since inception.
Now, it's important to note that while these outflows were among the biggest in history, they're still just a trickle compared with the inflows we've seen in recent years. For example, HYG still holds nearly $17 billion worth of high-yield bonds. LQD still holds more than $30 billion in assets. And these are just two of the biggest corporate bond funds among many.
Still, this is concerning...
As we've discussed, it's only a matter of time before some combination of rising defaults and higher interest rates will trigger a bond-market panic.
Ratings agency Moody's reports the speculative default rate has already spiked above 5.1%, a level that has historically signaled the beginning of a new credit-default cycle. And interest rates have quietly risen to multi-month highs since bottoming this summer.
In other words, a serious bond-market decline could begin at any time... And last week's outflows could be the first sign of much bigger problems to come.
They suggest some investors are already getting skittish and are ready to rush for the exits at the first sign of trouble. Of course, as we noted earlier, when the selling begins in earnest, many more folks may be shocked to find the exits are closed.
How to profit while others panic...
While a crisis is inevitable, it's important to realize these problems don't have to be bad news for you...
Just as a handful of hedge funds and major investors made billions during the last debt crisis while most folks panicked, a handful of savvy investors are certain to make a fortune as the corporate-debt bubble implodes.
And we're launching our new Stansberry's Big Trade service to help you be one of them.
This service will show you how to use low-cost put options to make 10 to 20 times your money as the corporate-default cycle develops and hundreds of companies default on their debts, wiping out their equity investors.
As Porter has explained, this isn't just the best way to "insure" your portfolio against market declines... it's the best opportunity for huge speculative gains he has ever seen. And he's hosting a FREE, live event on Wednesday, November 16 at 8 p.m. Eastern time to explain this strategy in detail and ensure every interested Stansberry Research reader can put it to use.
Again, this event is absolutely free to attend, and there is no obligation to purchase our new service. Reserve your spot instantly by clicking here.
Don't miss Porter's latest interview...
Speaking of Porter, he was a recent guest on The Meb Faber Show – the free weekly podcast of our good friend Meb Faber, co-founder and Chief Investment Officer of Cambria Investment Management.
And if you're a fan of Porter's radio show, you're in for a treat...
Porter's latest thoughts on the corporate-bond market and our new Stansberry's Big Trade service alone are worth tuning in for. But this wide-ranging interview covers much, much more, including...
The story of how Porter got started in the investment research business... His philosophy on wealth-building... How he personally approaches asset allocation, stop losses, and hedging... His worst investment call of all time... The biggest mistakes he has seen subscribers make... The "secret" to his success... and more.
Check it out for yourself right here. (You can also find more listening options – including iTunes and Google Play – on Meb's blog here.)
One final note before we sign off today...
Meb is celebrating the 10th anniversary of his blog this week. In appreciation to his readers, he has generously agreed to give away all of his excellent online books for free on Amazon all week. If you haven't already read them, we urge you to take advantage of the offer right here.
New 52-week highs (as of 11/1/16): none.
Are you among the many Stansberry Research subscribers who have signed up for early "beta" access to Stansberry's Big Trade? We'd love to hear what you think so far. Let us know at feedback@stansberryresearch.com. And be sure to read the latest essay from contributing editor P.J. O'Rourke below...
Regards,
Justin Brill
Baltimore, Maryland
November 2, 2016
Waiting for the Other Shoe to Drop
This election is like watching a horror movie starring an actress I can't stand and an actor I don't like... so I'm rooting for the ghouls and goblins that infest the haunted (White) house.
However, a lot of scenes still make me scream and cover my eyes (or my ears, in the case of Trump).
I don't care much about what happens to either of the stars, but nonetheless, I'm on the edge of my seat anticipating how the movie will end.
Just when I thought that Trump had been fatally strangled by the tentacles of the Microphone Monster from the Access Hollywood crypt, FBI Director James Comey is revealed to be one of the undead, leaping out of Anthony Weiner's laptop from hell and sinking his fangs into Hillary's lead in the political polls.
Last week, just after Hillary's new e-mail scandal broke, I had a chance to talk to syndicated newspaper columnist and Fox News commentator Charles Krauthammer (a personal hero of mine). I said to Charles...
WTF! The Secretary of State using her personal e-mail to send top-secret State Department documents to her somewhat strange and scary personal aide Huma Abedin, who is married to a crazy person, Anthony Weiner, who has destroyed his political career twice by sending lewd Tweets and Instagram photos to random women and who is now under investigation for sexting with an underage girl. And top-secret State Department documents wind up on HIS computer! How much weirder can things get?
Charles is always quick with a quip. "What if," he asked, "the underage girl speaks Russian?"
So, yes, things can get weirder. On Sunday, WikiLeaks announced, rather ominously: "We commence phase 3 of our U.S. election coverage next week." And nobody ever knows what Trump will say or do next.
So I'm waiting for the other shoe – or the rest of the underwear, or whatever – to drop.
In the meantime, while I'm waiting, I've been pondering a question that has been bothering practically everybody in America...
How did we wind up with these two jerks as our presidential candidates?
We'll probably wrestle with that question for years... But I do have some thoughts.
The Democratic and Republican Parties act like they are integral parts of the U.S. government. But in fact, they're private organizations with no more Constitutional standing than motorcycle gangs.
Maybe in 2020, we'll select our two major presidential candidates with fists, chains, and knives in the parking lot of a biker bar... in which case, expect either Leadhead Eddie of the Bandidos or Gypsy Joker member Bob the Beef to oust the Oval Office incumbent.
Currently, however, we have a dumber way of picking who'll run for president. This involves primaries and caucuses. Both Democrats and Republicans have them in all 50 states and the District of Columbia.
(Although until 1961, people who lived in D.C. were considered to be overexposed to the debilitating effects of political radiation, and therefore they were not competent to vote.)
Democrats and Republicans also have primaries and caucuses in American Samoa, Puerto Rico, Guam, the U.S. Virgin Islands, and the Northern Marianas to make sure that residents of U.S. territories who don't get to vote in presidential elections have a say in who they don't get to vote for.
Things were never any better. Until the 1830s, a presidential candidate was usually selected by a political party's congressional delegation. We can imagine the insider deals hatched in the era's smoke-filled rooms. (Although, I guess in those days they were "snuff-filled rooms.")
Back then, the Senate wasn't directly elected, and the general franchise was severely limited. Voters had about as much say in choosing the presidential nominee as you have in choosing your airline seat when using frequent-flyer miles to travel on a holiday weekend.
Nominating conventions were thought to be a more democratic alternative. But the first presidential nominating convention was held in 1831 by the Anti-Masonic Party. It was adamantly opposed to Shriners in miniature cars driving around in circus parades. Or something. And that pretty much set the tone for wisdom and intelligence at national political-party conventions for the next 70 years.
State- and local-party bosses quickly took control of the conventions. To wield political influence, you no longer had to be anything as elevated as a crooked elected official. Just being crooked would do.
Of course, there's nothing that can't be made worse by reform. Reformers of the late 19th- and early 20th-century "Progressive Era" took aim at the conventions, seeking to replace them with some type of referendum – a preliminary vote (a "primary") or a public committee meeting (a "caucus") – through which ordinary citizens would select convention delegates.
In 1901, the first state law creating a presidential primary was enacted in, of all places, Florida, which was, then as now... you know what I mean... Florida.
The practice of holding primaries and caucuses spread to every place like a flutter of those famous 2000 Florida presidential election "hanging chads" shaken loose from a tampered ballot.
With results for all to see.
The primaries and caucuses have different rules, depending on your location. It's like a baseball game where if you're on first base, you're supposed to dunk the ball through the net... But if you're on second base, you're supposed to knock the puck past the goalie... And if you're on third base, you're supposed to kick a field goal.
Primaries are make-believe voting. You have an election, but instead of electing a candidate, you elect a candidate for election.
Caucuses are coffee klatches for people who need to find a bingo game.
State and territorial primaries and caucuses take place at different times. Each is scheduled to be either so early that who you vote for doesn't matter or so late that it doesn't matter how you vote.
Who's in charge of this process? Nobody. Because that's who's in charge of the Democratic and Republican Parties. The Democratic and Republican national organizations aren't in charge because they're run by the Democratic and Republican Party state organizations... which aren't in charge because they're run by the Democratic and Republican Party county organizations.
The U.S. has 3,143 counties. The Republican Party county chairman is a retired Dairy Queen franchisee in polyester slacks with a white vinyl belt and matching shoes. The Democratic Party county chairwoman owns 19 cats.
Only a little more than a quarter of eligible voters cast ballots in Democratic or Republican primaries and caucuses.
More than half of the Republicans and nearly half of the Democrats supported candidates other than the two we got.
According to figures from the New York Times (and, per Trump's claims that the Times is part of the liberal vote-rigging process, the Times should know), it was just 14% of the people entitled to vote who gave us Hillary Clinton and Donald Trump.
Regards,
P.J. O'Rourke