A New World Dominator
New worries from China... Chinese government: No more 'fantasy' stimulus... The backlash against negative interest rates begins... A new World Dominator...
China released a ton of economic data over the weekend... and analysts are getting worried again.
Every measure – including industrial production, investment, and retail sales – fell well below market expectations.
The Wall Street Journal reports industrial production rose 6% year over year in April, compared with 6.8% in March. Fixed-asset investment in urban areas grew by 10.5%, compared with 10.7% for the first quarter. Retail sales grew by a 10.1% annual rate, compared with 10.5% in March.
A report on Friday also showed Chinese banks drastically cut back on lending last month, and the government slashed fiscal spending to an annual rate of just 4.5% in April, compared with 20.1% in March. This was a huge drop from the 20.1% annual increase in spending recorded last month.
These weaker-than-expected reports followed an unusual front-page article last week in China's People's Daily newspaper, the official state-run "mouthpiece" of its communist government.
The article cited an anonymous "authoritative person" who said that excessive debt is the "original sin" that leads to crisis, and that the government can no longer use the "fantasy" of aggressive easing and stimulus to delay dealing with these problems.
According to Bloomberg News, the person also said while bankruptcies should be avoided, "zombie" companies should be allowed to fail. The figure also said that the Chinese economy can continue to grow without stimulus, but that expectations should be dramatically lowered. In particular, he said its performance would be "L-shaped," rather than "U- or V-shaped" for "quite some time, rather than just a year or two."
The latest data suggest the government may be serious about these efforts... but only time will tell.
Without massive stimulus, there's likely much more pain ahead. If the Chinese economy grinds to a halt or its stock market crashes again, we won't be surprised to see the government quickly change its stance.
The backlash against negative interest-rate policy ("NIRP") has begun...
One of the more unbelievable consequences of NIRP has occurred in the housing market. Last month, the Journal reported that thousands of folks in Denmark – one of the first countries in the world to implement negative rates, nearly four years ago – are now getting paid to live in their homes.
How can that be?
It's because mortgage rates in many countries are tied to short-term interbank lending rates. When the central bank lowers its short-term rate, these rates follow. This means when short-term rates move far enough into negative territory, the rates on variable interest-rate mortgages can become negative, too.
That's exactly what's happening...
And now that the European Central Bank has adopted NIRP as well, mortgage rates in Spain and Portugal – which are also tied to short-term bank rates – are moving close to negative territory, too.
As you might expect, governments and consumer advocates in those countries insist that banks are contractually obligated to pay borrowers. As one Portuguese lawmaker noted...
It was the banks that chose to fix loan rates to [short-term rates], not customers... It's a matter of principle and trust to follow the rules of the contracts.
But bank executives disagree. They say paying someone to borrow is absurd. They warn it could also put these countries' entire banking systems at risk. Even the head of Portugal's own central bank, Carlos Costa, agrees. As he said last month...
We have to find a fair balance between the expectations of the borrowers and the need to safeguard the stability of the financial system.
The banks advocate placing a zero-percent interest-rate "floor" on mortgage rates, so that borrowers will never be paid to borrow.
We have to admit, both sides have valid points...
On one hand, banks knowingly entered into these contracts, and they certainly wouldn't hesitate to increase mortgage rates if short-term rates began to rise.
On the other, many European banks are already in trouble. Weak economies, increased regulation, and years of super-low rates have crushed their earnings... And a collapse in the banking system would likely hurt savers more than anyone.
What happens next is anyone's guess... But as the NIRP experiment continues (and potentially spreads), you can expect unintended consequences like these to become much more frequent and far more serious.
Finally, Extreme Value editor Dan Ferris has some great news for folks looking for a safe opportunity to invest in today...
In short, Dan tells us he has found a new "World Dominator" investment.
If you aren't familiar with the term, World Dominators are stocks that are No. 1 in their markets, gush free cash flow every year, have great balance sheets, and tend to pay growing dividends every year.
Longtime Digest readers know Dan has had great success over the years recommending these safe, lucrative stocks like Microsoft (MSFT), Procter & Gamble (PG), Johnson & Johnson (JNJ), Intel (INTC), and others. In fact, his Extreme Value holding Constellation Brands (STZ) – a World Dominator of premium wine and beer – is the best-performing open position among all Stansberry Research analysts, up more than 600%.
Unfortunately, the long bull market has caused even these high-quality stocks to become expensive. For the past several years, Dan has been unable to find new World Dominators cheap enough to recommend in Extreme Value. That is, until now...
Dan says his new World Dominator isn't a typical company... which has allowed it to go relatively unnoticed by most investors so far.
Unlike most other World Dominators, this company really only dominates one market in one country. But it's the biggest market in one of the richest countries in the world.
This company that Dan recommends holds one-of-a-kind real estate and entertainment franchises that are all No. 1 in their market... similar to the way Disney (DIS) dominates the theme-park market worldwide, and owns iconic characters like Mickey Mouse and Queen Elsa from the hit movie Frozen.
Dan and his research analyst Mike Barrett say these assets are like "beachfront property," which tends to maintain its value even when times are tough. And today, they say you can buy these unique assets at a steep 40% discount to what they're really worth.
Dan and Mike scour every corner of the market in search of high-quality assets trading at big discounts... and they believe this is the single best Extreme Value opportunity available to investors today.
Dan shared all of the details on his latest World Dominator in the April issue of Extreme Value. If you don't subscribe yet, you can learn more about this opportunity right here. (This does not lead to a long promotional video.)
New 52-week highs (as of 5/13/16): Invesco Value Municipal Income Trust (IIM), Pretium Resources (PVG), Silver Standard Resources (SSRI), and Vanguard Inflation-Protected Securities Fund (VIPSX).
A quiet day in the mailbag. What would you like to read more about? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
May 16, 2016
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