A New Reason to Own Gold
Get ready for a 'vortex of negative headlines'... Druckenmiller: The bull market is 'exhausted'... Oaktree: The default cycle has started... A new reason to own gold...
This summer could be one for the record books.
At least, that's what Porter believes. As he explained in the April 29 Digest...
This is the most detailed and timely warning I (Porter) have ever written. I hope you'll take it seriously...
I know most of you won't. Later, you'll claim that you didn't see it, or you didn't take the time to read it. But the truth is... you just won't be able to process the facts I outline below. And let me be clear: These are facts.
What you'll find below aren't views or opinions. Or the ramblings of some mumbling oracle. I'm not talking about "Kondratieff waves"... or George Soros' aching back. These aren't hunches or guesses. I'm going to show you, in real time, how the entire system of modern, paper-based finance is coming unraveled. It's happening right now. And I believe the panic will start in May. In fact, I believe for decades to come, the summer of 2016 will be recalled as the beginning of the end... a period of grand financial catastrophe.
After the rally of the past couple months, this isn't a popular opinion. But Porter isn't alone...
In an interview with Bloomberg yesterday, Bank of America Merrill Lynch's top U.S. equity strategist Savita Subramanian warned that stocks could be headed for a retest of February's lows this summer.
She is especially worried about the lack of liquidity in the markets. Subramanian said stocks have been trading on headlines rather than fundamentals, and warned that a "vortex of negative headlines" is about to begin.
She pointed to three big events in particular: the upcoming "Brexit" vote, where Britain will decide whether or not to remain in the European Union ("EU")... the Federal Reserve's upcoming interest-rate decision... and this fall's U.S. presidential election.
If Britain were to leave the EU, the move would create huge ripples through the currency markets. There's no telling how other markets could react.
Like Porter, Subramanian noted that corporate profits have been falling for several straight quarters. This marks the first time in recent history that the Federal Reserve has started raising rates during a "profits recession," meaning additional rate cuts could be a much bigger headwind than they have been in the past.
Finally, she said this year's presidential election could add to the volatility over the next several months...
We're heading closer and closer to the most polarized election that we've seen in our careers. So there's a lot to worry about... One of the things we've noticed is that about six months ahead of November in an election year, the market typically peaks and trends downward.
One of history's greatest investors also believes the rally is ending...
If you're not familiar, hedge-fund manager Stanley Druckenmiller earned 30% average annual returns – without a single losing year – giving him one of the best long-term track records on Wall Street. And he's incredibly bearish today.
Speaking at the Sohn Investment Conference in New York last week, Druckenmiller said the bull market is clearly "exhausted." And this time, he says central banks will be unable to keep it alive. From his presentation (emphasis added)...
I have argued that myopic policy makers have no end game, they stumble from one short-term fiscal or monetary stimulus to the next, despite overwhelming evidence that they only produce an ephemeral "sugar high" and grow unproductive debt that impedes long-term growth.
Moreover, the continued decline of global growth despite unprecedented stimulus the past decade suggests we have borrowed so much from our future for so long the chickens are coming home to roost.
Three years ago on this stage I criticized the rationale of Fed policy but drew a bullish intermediate conclusion as the weight of the evidence suggested the tidal wave of central-bank money worldwide would still propel financial assets higher. I now feel the weight of the evidence has shifted the other way; higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself.
Druckenmiller also reaffirmed his massive position in gold, noting that the spread of negative interest rates has made him more bullish than ever...
It has traded for 5,000 years and for the first time has a positive carry in many parts of the globe as bankers are now experimenting with the absurd notion of negative interest rates. Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation.
Of course, regular Digest readers know Porter isn't just worried about stocks... Despite the recent rebound in the credit markets, he believes a period of vast credit default is approaching. Here too, he's in good company...
In its latest quarterly earnings call, Oaktree Capital Management – led by legendary distressed-debt investor Howard Marks – noted it also believes the next big default cycle is starting. As Co-Chairman and Chief Investment Officer Bruce Karsh explained to investors on the call (emphasis added)...
The credit markets' panic attack from January through February reminds us that market psychology is fragile. Liquidity can suddenly become scarce and capital markets can quickly shut.
Moreover, we believe that signals that an upswing in defaults has finally started, and that we are a big step closer to the next expanded distressed-debt opportunity.
If you missed Porter's latest warnings in that Digest, be sure to catch up immediately right here.
Speaking of gold, our friend and former colleague Kim Iskyan says another "wild card" could send precious metals prices much higher this year. As he wrote in yesterday's issue of his free Truewealth Asian Investment Daily e-letter...
In August 2011, partisan infighting in the U.S. Congress nearly resulted in a default on U.S. government debt. During that episode, yields on one-month Treasury bills climbed to a 29-month high. That means that, as U.S. government debt was viewed as riskier, investors demanded a higher yield to hold it – and prices of bonds fell. (For bonds, the yield increases when the price falls, and vice versa.)
As Kim explained, during times of uncertainty and fear, investors tend to sell riskier assets and "flee" to the relative safety of U.S. Treasurys. But when Treasurys are uncertain, too, that leaves only gold...
In the summer of 2011, as the political dispute that led to the standoff over U.S. government debt simmered, the price of gold soared 25% from early July through mid-August. The next month the price of gold hit levels not seen since 1980.
Why do we bring this up today? Because Kim believes this year's presidential election could create a similar scenario...
Late last week, a man who's very likely going to become a U.S. presidential candidate suggested that the U.S. government might consider negotiating a partial repayment with creditors. That is, a U.S. government led by Donald Trump might see U.S. government debt as repayment-optional.
According to the New York Times, likely Republican presidential candidate Trump told CNBC, "I would borrow, knowing that if the economy crashed, you could make a deal." He added, "And if the economy was good, it was good. So, therefore, you can't lose"... Trump was suggesting that "he might use his business skills to reduce America's debt burden by pushing creditors to accept write-downs on their government holdings."
As the New York Times explained, "Such remarks by a major presidential candidate have no modern precedent. The United States government is able to borrow money at very low interest rates because Treasury securities are regarded as a safe investment, and any cracks in investor confidence have a long history of costing American taxpayers a lot of money."
Whatever your feelings about Trump, there's no denying this scenario could create massive volatility in the government-bond market... if not an outright crash.
Sure, it's a relatively low-probability risk, but Kim reminded readers that many folks were saying the same thing about Trump's candidacy just months ago...
The price of U.S. Treasurys barely moved on Trump's comments. This suggests that traders and markets see little chance of Trump breaking the sanctity of the risk-free promise of U.S. Treasurys. "This is stupid and ridiculous and never going to happen," said one banker quoted by Bloomberg.
But... not long ago, the chances of Donald Trump becoming an actual U.S. presidential candidate were viewed in similarly dim terms. Dozens of political analysts were, just months and weeks ago, absolutely convinced that Donald Trump was not going to become the Republican presidential candidate. So writing off Trump's unique vision of the U.S. Treasurys market is a bad idea...
There are lots of good reasons to own gold... and Donald Trump just gave investors another one. If Trump's candidacy advances, and there is a greater-than-zero chance that the president of the United States views U.S. debt as subject to a deal, the price of gold will soar.
[Editor's note: Kim's new venture – Truewealth Publishing – is dedicated to providing world-class, independent investment insight on Asia and world markets. You can learn more about his excellent free daily e-letter – The Truewealth Asian Investment Daily – right here.]
New 52-week highs (as of 5/9/16): Becton Dickinson (BDX), Welltower (HCN), Johnson & Johnson (JNJ), McDonald's (MCD), Medtronic (MDT), Annaly Capital Management (NLY), Nuveen Premium Income Municipal Fund 2 (NPM), Ritchie Bros. Auctioneers (RBA), Regions Financial – Series B (RF-PB), Constellation Brands (STZ), and Sysco (SYY).
In today's mailbag, TradeStops founder Dr. Richard Smith answers a handful of the most common subscriber questions about last week's webinar. Send your questions, comments, and complaints to feedback@stansberryresearch.com. As always, we can't provide individual investment advice, but we read every e-mail.
"Can TradeStops be used with any security, stock, investment? Thank you." – Paid-up subscriber Mark P.
Richard comment: We cover a broad spectrum of investments. In the U.S., we cover equities (including pink sheets and over-the-counter), mutual funds, exchange-traded funds (ETFs), and options (equity and index). Globally, we cover equities in Canada, London, Australia, and Germany.
"The presentation was well done especially when two people with opposing views (Bearish & Bullish) agree to the benefits of TradeStops. However examples of portfolios presented were in the million dollar plus [range] leaving unaddressed: What is the minimum portfolio one should have to make TradeStops cost beneficial – although admittedly the offer price was quite reasonable." – Paid-up subscriber Joe
Richard comment: TradeStops has useful information for any level of investor. However, as an investor, you need to consider what you're paying in fees relative to the total amount of money you're managing. If you're paying more than 2% of your investable assets annually for investment-management resources, you're probably spending too much relative to what you have to have invest.
"I just wanted to comment on the webcast from the other night. Although I was not able to listen to this live I did listen to the recorded session and felt that this was one of your better webcasts that I have listened to. I really liked not only the content of Dr. Smith's TradeStops technology but the give and take from Porter and Steve on their perspectives of the economy and the near term future of investing. It shows that regardless of the technology, personal perspectives are always in play when it comes to investing. I liked that a lot.
"I did have a question(s) regarding the presentation that I wanted to ask but could not due to the pre-recorded nature of the webcast. Here are my questions(s):
"1. All of the discussion was around individual investments... What if we have funds (mutual or ETF)?
"2. If we have more funds than individual investments, how does the 20 position [guideline] Dr. Smith recommended fit?
"Again, I loved this presentation and as a subscriber to Porter's and Steve's newsletters it was great to hear their debate along with Dr. Smith's presentation. Well done." – Paid-up subscriber Dan W.
Richard comment: TradeStops does cover mutual funds and ETFs. Limiting your portfolio to around 20 total positions is a personal rule of thumb. It's obviously up to you. But I believe the individual investor will do better in a more concentrated portfolio. ETFs are already more diverse than individual equities.
Regards,
Justin Brill
Baltimore, Maryland
May 10, 2016
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