47% of Americans Can't Do This
Japan 'shocks' the world... The markets have gone off the rails... The latest on the economy... Why debt-fueled buybacks matter... An unsustainable trend... 47% of Americans can't do this... A note from The Atlas 400...
This morning, Japan's central bank – the Bank of Japan ("BOJ") – shocked the world... by doing nothing.
That's right. Markets have become so dependent on central bank easing and manipulation that simply maintaining these unprecedented efforts is seen as a failure.
Never mind that the BOJ has already pushed interest rates into negative territory, and is still buying billions of dollars' worth of bonds (and even stocks) each month through its quantitative easing ("QE") program.
Just look at some of the comments from "investors" this morning, courtesy of the financial blog Zero Hedge...
"It's a total shock," Nader Naeimi, head of dynamic markets at AMP Capital Investors told Bloomberg. "From currencies to equities to everything – you can see the reaction in the markets. I can't believe this. It's very disappointing."
"I'm very disappointed. I wanted the BOJ to do something and the BOJ should have done something," said Masaru Hamasaki, head of the investment information department at Amundi Japan Ltd. "Kuroda has created mostly positive surprises so far, but this time it's negative. The BOJ hasn't been on the same wavelength as markets this year."
Japanese stocks plunged 3.6% on the news, while Japan's currency, the yen, jumped 3% versus the U.S. dollar and the euro. That's a huge move for a currency, and the biggest one-day rally in the yen since 2011.
Meanwhile, the U.S. Federal Reserve announced yesterday that it would keep interest rates unchanged, as it has at each monthly meeting this year.
The Fed raised interest rates for the first time in 10 years last December, and originally predicted as many as three or four additional rate hikes in 2016. So this inaction has been seen as a more "dovish" stance.
Still, this means all three of the world's most prominent central banks – the Fed, the BOJ, and the European Central Bank ("ECB") – are standing pat this month.
We can't help but wonder how these stimulus-addicted markets will react... especially as the traditional "sell in May and go away" period of seasonal weakness is about to begin.
And if markets begin to fall again, what will central banks try next?
In the meantime, the U.S. Department of Commerce reported this morning that the U.S. economy grew at its slowest pace in two years in the first quarter of the year.
The report showed that GDP slowed to a 0.5% annual growth rate, compared with rates of 1.4%, 2%, and 3.9% for the past three quarters.
More concerning, the report showed business investment plunged by the most since the financial crisis. Considered alongside the dismal corporate earnings this quarter, it could be an early sign the economy is slowing again.
We've discussed how more and more companies have been turning to tricks like "alternative" accounting and debt-fueled stock buybacks to cover up an undeniable problem: a decline in real earnings growth.
Companies have loaded up on massive amounts of debt to buy back their own shares and keep paying dividends. Because stock buybacks reduce the number of shares outstanding, they allow a company to increase the earnings per share it can report (since earnings are divided by a smaller number of shares).
When used appropriately – particularly when shares are cheap and the company has plenty of cash – they can be fantastic.
But that isn't the case today...
Even some of the best-run firms, like oil giant ExxonMobil, have been spending more on buybacks and dividends than they actually earn through operations, while taking on debt to make up the difference. And that strategy comes with a cost...
All that debt – even cheap debt – has to be serviced. And if a company is already spending more than it earns, it must generate more cash just to service those debts.
But that isn't happening...
According to analysts at Societe Generale, not only is cash flow not keeping up with rising debt levels, it's actually heading in the opposite direction.
Net debt levels for U.S. non-financial companies are rising at a rate of nearly 30% a year. Meanwhile, earnings before interest, taxes, depreciation, and amortization ("EBITDA") – a proxy for operating cash flow – are shrinking.
In fact, as you can see in the chart below, adapted from Zero Hedge, debt is now growing faster than cash flow than it has at any time in the past 15-plus years...
Clearly, this is an unsustainable trend...Companies cannot continue to borrow more than they earn forever. And if the economy truly slows – or interest rates on this relatively cheap debt rise – this problem could become much, much worse in a hurry.
A recent article in the May issue of The Atlantic suggests the financial situation for a huge number of Americans may not be much better.
The article references the Federal Reserve Board of Governors' survey on the "financial and economic status of American consumers," and one data point in particular was shocking...
In short, when asked how they would pay for a $400 emergency, 47% of those surveyed said they would either have to borrow or sell something to cover the expense, or they would not be able to pay the $400 at all.
You read that correctly... According to the Federal Reserve, nearly half of Americans don't even have $400 in emergency savings. And it isn't just the poor... this figure reportedly includes many who earn middle-class and even upper-middle-class incomes.
Just like U.S. companies, U.S. consumers have too much debt and too little income. And years of central bank manipulation – which have encouraged folks to take on more debt but have done little for the real economy – have made things far worse.
And yet, the bull market continues...
During the big declines last summer and early this year, the major U.S. indexes never fell the 20% from last May's all-time highs that officially defines a bear market.
Even though stocks remain below those all-time highs – and have essentially gone nowhere for the last year – the bull market is still officially intact. This means as of today's close, the bull market will have lasted 2,607 calendar days, making it the second-longest bull market in history.
As always, no one can say for certain...
There are plenty of reasons for concern... Despite the huge rally since February, the benchmark S&P 500 is still below last year's highs... the "lions" and "deviants" remain in long-term downtrends... and several measures of bullish sentiment have soared to levels that typically lead to declines.
On the other hand, there's no denying the Federal Reserve and other central banks are willing to do what they can to push markets higher. And while it appears they're running out of "ammunition" to keep asset prices inflated, there's no telling what they may try next. It's possible they may succeed at keeping the bubble growing awhile longer.
In the meantime, we continue to recommend a conservative approach.
Investors who hold a diversified portfolio of high-quality stocks, carefully selected short sales, and plenty of cash and gold are doing well today... and they're prepared for whatever happens next.
We'll close today's Digest with a note from Gray Zurbruegg, director of The Atlas 400...
Your opportunity ends in two weeks...
Just twice a year, The Atlas 400 accepts new applications for a short window. And in two weeks, we won't accept applications again until August 2017.
We recently had to change our application process because, frankly, our club has been growing too quickly.
But, should Atlas be right for you, you may have the opportunity to join us in New York City next month for our top event of the year. More on that in a moment...
It's an international social club.
Our purpose is simple: to bring intelligent, successful, like-minded people together to exchange ideas... enjoy new experiences... and make new friends among equals.
We do this by hosting amazing adventures around the world.
We take people out of their daily routines, out of their comfort zones, and place them in a faraway land with a group of like-minded people.
Each Atlas 400 member enters with a thirst for new experiences. And that thirst sends him around the world – be it dropping down in Zanzibar or wine tasting in New Zealand – with other travelers.
The group is made of successful, self-made folks. They understand the hard work and self-reliance it takes to achieve success. They're some of the most thoughtful and stimulating people I've come in contact with.
And when you get people like this together – leaders in medicine, art, and industry – you simply cannot duplicate the dynamic.
On our adventures, I've watched strangers become friends... friends become investment partners... and the club's 100-plus members form inseparable bonds.
The Atlas 400 now has members in 19 countries and 30 states. We meet about 10 times a year – on trips, for dinners, at conferences, etc.
Yes, we're getting bigger. But we don't grow the club for growth's sake. We're only looking for the right members. We still grow the club one by one. And there's still a three-part interview process for all new applicants.
While growth is good, our focus remains on adding the right people to benefit the whole.
Also, diversity makes our meetings more interesting. We've leveraged new connections to recruit speakers not available to the public.
For instance, the theme of this year's annual meeting is "health and wellness." And a major tech investor was able to recruit the CEO of Human Longevity to speak.
Dr. Craig Venter runs Human Longevity. He's the first person to completely map the human genome. Through this new venture, he's changing preventive medicine.
It's the cutting edge of science and technology. And where else do you have a CEO captive for a few hours?
Who knows what we'll hear – possible ways to extend our lives? New treatments for saving loved ones? Or news of small companies changing the medical landscape that currently need capital injections?
As I mentioned, we're hosting our annual meeting this May at the St. Regis in New York City.
It's one of my favorite events of the year... More than 100 Atlas members and their guests gather for two amazing evenings in the city.
It's a wonderful experience... But the current deadline's approaching. And we still have room for a few more. To apply, please click here.
I hope you'll join me in New York this May.
And who knows what adventures we'll have in the future...
New 52-week highs (as of 4/27/16): Aflac (AFL), Becton Dickinson (BDX), Bank of Montreal (BMO), Ciner Resources (CINR), Deutsche Bank Gold Double Long Fund (DGP), Medtronic (MDT), Prestige Brands Holdings (PBH), Pretium Resources (PVG), Reservoir Minerals (RMC.V), and Silver Standard Resources (SSRI).
In today's mailbag, another subscriber writes in discussing Porter's updated "End of America" essay... and another weighs in on Japan's stock-buying spree. Send your notes to feedback@stansberryresearch.com.
"You asked for feedback, so here it goes: When I was much younger, I was single and living in Salt Lake City, Utah USA. If you weren't LDS (Mormon), not terribly religious, and over 30, the dating scene was a bit different. One evening, I found myself at a table with several other women. Most of them fit the profile that worked for me but one thing became immediately obvious – they all knew each other. After asking a few questions, I found that they were all friends and worked as accountants for the IRS. Seems that when you mailed in your tax return, it went to Ogden, Utah which was just up the road.
"I tried to keep an open mind as I have a natural aversion to both the federal government and to the IRS, but it was difficult. They seemed to enjoy each others' company and spoke freely. I began to ask a few questions as their smug, government-employee attitude seemed to grow with the amount of alcohol they consumed. Then, to my surprise (and I am rarely surprised), one of them spilled the beans. She said, 'As long as there has to be a 'determination of income', I will always have a job.' This is the best argument for getting rid of the federal income tax I have ever seen..." – Paid-up subscriber Ron B.
"If the BOJ is now the top shareholder in many of Japan's top companies, then effectively Japan has become a state owned economy. Eventually the ECB and Fed will follow suit when they run out of debt to buy. The irony here is that we are headed towards soviet era communism without even realizing it, or worse in the name of defending capitalism. The world fought wars against the communist for almost half a century only to eventually agree with their enemy? Meanwhile China is moving the other direction and divesting their state owned assets? This is a bizarre world we live in indeed!" – Paid-up subscriber Howard L.
Regards,
Justin Brill
Baltimore, Maryland
April 28, 2016
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