In today's Digest Premium, Porter predicts the event that will lead us into another financial crisis... And he highlights one place where we could see the first signs of it.
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When we'll see the next large crisis...
In last Friday's Digest Premium, I (Porter) explained why I think the dollar will rally over the short term (as money seeks safety). But I also said this rally won't last... Eventually, Bernanke will announce further quantitative easing to boost the bond market. And that's when the world will flee Treasurys...
So when will interest rates soar?
Honestly, I have no idea of the timing of these things. They depend on a variety of factors. I just know that people are looking to get out of bonds because they're afraid the Fed will stop buying them – or even decide to sell.
The Fed owns around $3 trillion of U.S. debt. No sane investor should want to hold an asset whose ownership is so concentrated and waiting to sell.
And consider the macro factors...
Today, the inflation rate in the U.S. and the 10-year Treasury yields don't make any sense. The real rate of inflation in the U.S. is around 4%-6%. Meanwhile, yields on 10-year Treasurys were less than 2% for a long time. (They're at 2.48% today.)
Why would you want to hold an asset that is guaranteed to lose you money every year via negative real interest rates? It doesn't add up. People are right to sell. But the consequences of that selling will be great pressures on already weak financial companies (like our largest banks)... It could also mean a move down in the housing market, which no politician wants.
All of these factors are in play, but the timing of them is completely uncertain.
If I had to make a guess, I would say we're looking at a period of six to 12 months of rocky markets. These will lead into another large crisis. And the crisis will come because somebody is highly leveraged into fixed income.
You can look at the mortgage real estate investment trusts (REITS) as one of the primary candidates for failure. You can also look generally at REITs. These companies are highly leveraged into real estate. And they're dependent upon the interest-rate curve and low interest rates in general. (These companies borrow short-term money and invest at long-term rates.)
And many of these companies struggled this month. Look at this one-year price chart of Annaly, the largest U.S. mortgage REIT:
For these stocks, the big question is short-term rates. If short-term rates shoot up and invert the "yield curve" (meaning short-term rates rise higher than long-term rates)… many of these business models simply don't work.
Again, I'm not predicting the timing… But I do believe if we see some large failure in the banking system related to an inverted yield curve, Bernanke will have to step in again.
So that's my scenario for what happens from here.
As far as the people who don't agree with me… who think that we are on the cusp of a great prosperity… that there is no downside to printing all this money and that the Fed can manage whatever risks may occur…
I hope they're right... I really do. It would be wonderful if we truly did have a great-and-all-powerful wizard who could make all of the ills and the risks of our lives go away and just grant everyone prosperity. It would be a wonderful, wonderful world.
But that's utopia. And the word "utopia" is derived from ancient Greek. It means "no place." So I just don't see how things will play out the way they believe.
– Porter Stansberry with Sean Goldsmith
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While U.S. stocks and bonds, gold, Chinese equities, and seemingly every other asset class on the planet got crushed over the past two weeks, one country's stock market is booming...
As Steve Sjuggerud pointed out in today's DailyWealth, Japan's Nikkei Index, the country's bellwether stock index, is up 5.9% in the past two weeks. And Steve says that's bullish in the short term for U.S. stocks...
"Here in the U.S., stock prices are down," he writes. "And the interest rate on the 10-year U.S. government bond has soared over the last month – from 2.1% to 2.5%. Japan saw something similar: From May 22 to June 14, Japanese stocks lost an astounding 20% of their value. While Japan's stock prices were falling, interest rates on government bonds in Japan went up a lot."
He went on to say...
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In short, long-term interest rates in Japan stopped going up... And stock prices started going up again.
And on cue, the Nikkei started the second half of 2013 with a 1.3% rise – its third up day since May and a one-month high.
More bullish news from Japan... The Bank of Japan publishes a quarterly report on sentiment among large manufacturers, known as the Tankan study. A positive reading means optimists outnumber pessimists. In the most recent, second-quarter report, the rating hit "4," up from "-8" in the first quarter.
At home, the Dow Jones and the S&P 500 are up more than 1% each... Gold is up nearly 3% to $1,260 an ounce.
Yields on the 10-year Treasury are steady at 2.49% (down from 2.59% on June 25). But the exodus in the bond market continues...
According to the latest data from research firm TrimTabs, investors pulled nearly $80 billion from bond funds last month through June 27...
"The herd is scrambling for the exit this month as bond yields back up across the board and central bankers hint that they might provide less monetary stimulus in the future," TrimTabs CEO David Santschi wrote in a research note released Sunday. "We estimate that bond mutual funds have lost $70.8 billion in June through Thursday, June 27, while bond exchange-traded funds have lost $9.0 billion."
Last month's redemptions are nearly double the previous high of $41.8 billion in October 2008 – months before the markets bottomed...
The heavy selling happened after Federal Reserve Chairman Ben Bernanke discussed how the central bank could begin tapering its $85 billion a month in bond purchases. As normally happens in times of panic, a lot of money is moving into cash... In just the last week, money-market mutual funds have seen $8.17 billion of inflows. That's why we're seeing such strength in the dollar, as you can see in the following chart of the U.S. Dollar Index, which measures the dollar against a basket of foreign currencies...
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In last Friday's Digest Premium, Porter told readers why he believed the dollar would rally in the short term. But in the long term, he's still bearish...
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With so much negativity surrounding the bond market today, the contrarian trade is buying Treasurys. If Steve's right about the U.S. following Japan's example… we could see a big short-term rally.
As we pointed out last month, two of the biggest and best bond investors in the world – Bill Gross of the investment management firm PIMCO and Jeff Gundlach of the firm DoubleLine Capital – like Treasurys at today's prices.
"July will not be the same type of month [as June]," Gundlach said on a June 27 webcast for DoubleLine clients. "There are profits to be made in the bond market between now and the end of the year."
And Bill Gross, whose PIMCO Total Return Fund is the world's largest bond fund, told Bloomberg on the same day that Treasury rates could fall 25 basis points (0.25%) from today's rates...
Now, we switch our focus to the commodities markets... corn in particular.
Corn prices fell Friday and today after the U.S. Department of Agriculture (USDA) announced U.S. farmers planted the largest acreage of corn since 1936...
The planted area for corn was 97.4 million acres, the highest since 1936's estimated 102 million acres. The number was 2 million acres higher than expectations.
Corn prices are down from their 2012 highs of more than $8.15 a bushel to below $5.04 today.
If the growing conditions are right this summer (moderate heat, moderate rain), it will be a blockbuster crop... And we can expect continued weakness in corn prices.
Corn prices are also suffering from the general economic malaise gripping the world today. Europe's finances are in shambles, China's growth is slowing down, and the only thing boosting the U.S. is monetary stimulus.
This is the perfect example of a cyclical commodity business... In 2012, we saw a huge spike in corn prices due to extreme heat and drought, which hammered the crop. So farmers planted a ton of corn to take advantage of higher prices.
Today, prices have come down... But the farmers still have that land allotted for corn.
Fortunately, grains have a much shorter cycle than copper or oil because it takes so much more time and money to extract copper and oil. Farmers simply have to plant more (or less) crop each year based on conditions. And right now, they're planting a huge amount. Good summer growing conditions will produce a bumper crop... and push prices even lower.
One of our indicators for global inflation, credit-card processor Visa, hit a new high today...
In his June 2009 Stansberry's Investment Advisory, Porter explained why Visa is a good hedge against inflation…
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Note this was written in the wake of the 2008-2009 economic turmoil… Visa had processed $3.8 trillion in the previous year. For the full-year 2011 (the most recent data available), Visa processed 77.6 billion transactions worth more than $6 trillion.
And according to the company's latest quarterly filing with the Securities and Exchange Commission, Visa had processed $3.3 trillion in the six months ended December 31, 2012 (the most recent numbers). Assuming a steady pace, Visa will process nearly double the amount of money in a full year as it did in 2008.
But as interest rates rise and credit dries up, Visa, like most other stocks, will fall.
New 52-week highs (as of 6/28/13): DCP Midstream Partners (DPM) and Ligand Pharmaceuticals (LGND).
Still more positive feedback from James Altucher's book, Choose Yourself. Oh, and one dissenter... Please send your feedback to feedback@stansberryresearch.com.
"I'm not even half-way through it yet. The guy is a prophet – I wish he were my friend I feel so strongly about his book. I felt a little uncomfortable at first, thinking it was an 'I'm God' kind of perspective, but his emphasis on thanking people for their part in his life and letting yourself flow from inside out to others is the essence of authentic human interaction. Relationships built on genuine love for others because you love yourself first. Ok, way too gooey, but damn, he's the most open book I've ever read. Thank you for giving him a platform – it may just change my life.
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"I'm about one third through the book and am thoroughly enjoying it. Not only am I enjoying James's personalizing of events but also his spot on analysis. Thank you for recommending it!" – Paid-up subscriber Fred
"I laughed a lot. I even cried a couple of times. But most of the time I was thinking and trying to make my 'brain sweat.' A really remarkable book." – Paid-up subscriber Bernard Hobby
"Altucher is a vulgar fraud. I can't understand why Porter and others cannot see through him. My confidence in Porter and Stansberry Research has been undermined." – Paid-up subscriber Patrick J. Roache
Goldsmith comment: As with most negative feedback we receive, there's no evidence to back it up – just name-calling. Based on the thousands of subscribers who have bought Altucher's book – and the overwhelmingly positive response – we believe we're doing everyone a service through our recommendation.
If you'd like to purchase a copy of Altucher's book, you can do so here... We've already sold out of our first order... And we'll likely sell out of our second order in the next few days. So act quickly.
Regards,
Sean Goldsmith
Miami Beach, Florida
July 1, 2013