A Shocking New Record in the Debt Markets
Get ready for lower interest rates… The market is now pricing in a 100% chance of a rate cut this month… A shocking new record in the debt markets… Even junk bonds are now trading with negative yields… This chart says gold could be headed much higher…
Well, it's all but official...
As regular Digest readers know, the market has been anticipating that the Federal Reserve could begin to cut interest rates as soon as this month. But following a one-two punch of Fed announcements today, it's now absolutely convinced.
During testimony before the House Financial Services Committee this morning, Fed Chairman Jerome Powell warned that the bank's view of the economy hadn't improved in recent weeks. "The bottom line for me is the uncertainties around global growth and trade continue to weigh on the outlook," he said.
This was followed by the release this afternoon of the minutes of the Fed's June policy meeting. And these painted a similarly "dovish" message. As the Wall Street Journal reported...
Federal Reserve officials grew more concerned about the economic outlook last month and discussed reasons why lower interest rates might be warranted in the coming months, according to minutes of their June meeting released Wednesday.
Fed officials voted to hold their short-term benchmark rate steady last month, but the minutes said many officials were ready to cut rates if an economic outlook clouded by slower global growth, weaker-than-expected inflation and uncertainty over trade tensions didn't soon improve.
"Many judged additional monetary policy accommodations would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook," the minutes said.
In other words, most Fed officials were in favor of cutting rates last month unless their outlook for the economy improved...
And just this morning, Powell told us in no uncertain terms that it has not. Barring a sudden improvement over the next two weeks, the Fed will almost surely kick off a new rate-cut cycle when it meets at the end of the month.
In fact, according to the CME Group's FedWatch Tool, the probability of at least a 0.25% cut this month is now 100%. The only question is whether the Fed cuts rates by 0.25% or a more extreme 0.5%.
As Porter detailed in his Friday Digest late last month, so-called 'real' long-term yields have already been plunging in the U.S. recently...
The Fed doesn't directly control these rates, but a new round of rate cuts will almost certainly accelerate this trend. So we're not surprised to see gold surging again today...
The metal rallied nearly 1.5% to close back above $1,400 per ounce for the first time in more than a week.
Of course, gold isn't influenced only by U.S. financial conditions...
As a globally traded asset, gold responds to monetary shenanigans in other major economies as well.
If you were with us back in 2016, you may recall that the big gold rally that year was fueled by the massive expansion of negative interest rate policy ("NIRP").
As we've discussed before, the idea of negative interest rates is nonsensical. It's like capitalism turned upside down. Instead of being paid to lend your money to a bank, government, or company, you're actually paying them for the "privilege."
As a result, negative-yielding debt simply shouldn't exist in a healthy, free economy. And prior to 2014 or so, it was practically unheard of.
But as the central banks of Europe and Japan began to ramp up NIRP in 2015, that all changed.
Between late 2015 and mid-2016, the total amount of negative-yielding debt surged more than sixfold... from less than $2 trillion to more than $12 trillion.
It appeared these central banks were beginning to step back from these policies...
The total amount of global negative-yielding debt fell by half – to roughly $6 trillion over the next two years.
But last fall, this changed again... Negative-yielding debt began to climb higher as central banks responded to new fears of a slowdown in the global economy.
This trend has continued to accelerate through the first half of 2019...
Late last month, the total amount of this debt broke through $13 trillion for the first time. And believe it or not, this total now includes a significant amount of junk-rated debt as well. As Bloomberg reported on Tuesday...
Central bankers hinting at more monetary stimulus have depressed yields so much that even some European junk bonds trade at levels where investors have to pay for the privilege of holding them.
The number of euro-denominated junk bonds trading with a negative yield – a status until recently associated with ultra-safe sovereign borrowers – now stands at 14, according to data compiled by Bloomberg. At the start of the year there were none.
Yes, you read that correctly...
Investors are now paying even the riskiest companies to take their money.
It's truly a lose-lose proposition. If the company defaults on this debt, they're likely to lose a significant amount of their investment. But even if everything goes right, they're guaranteed to lose money on these bonds.
And just as we saw back in 2016, the surge in negative-yielding debt has coincided with a big breakout in gold...
In fact, as you can see below, the charts of gold and negative-yielding debt look remarkably similar over the past few years...
Unfortunately, we fear this trend is likely just getting started…
The central banks of Europe and Japan appear to have abandoned whatever caution about NIRP they previously had. And now even the Fed is seriously discussing negative interest rates for the first time.
In short, despite these record highs, the amount of negative-yielding debt could still rise dramatically from here… which means new highs for gold and silver may not be far behind.
The American Jubilee Watch
Kamala Harris attacked Joe Biden on stage in front of millions of people...
During the Democratic presidential debates last month, the California senator eviscerated the former vice president over his opposition to federally mandated busing in the 1970s. Many political pundits lauded Harris' attack as a giant leap forward in her campaign.
If she could fearlessly confront a prominent figure such as Biden on a national stage, perhaps she'd be the best person to lead the Democrats' charge against President Donald Trump in 2020. But the attack overshadowed a much more alarming move...
You see, when NBC's Lester Holt – the moderator of the debate – asked the 10 candidates if their health care plans would "abolish their private health insurance in favor of a government-run plan"... Harris raised her hand. So did Vermont Senator Bernie Sanders.
Harris backtracked the next day, saying she misinterpreted Holt's question and that her plan to provide "Medicare for All" would not end employer-based health insurance.
We can't say for sure what's really in Harris' head – or what she'll say next. But either way, this is an important topic to track in the months leading up to the pivotal 2020 election.
The next American Jubilee – the inevitable national "reset" of our financial system – is coming...
A government-run universal health care plan would just be the start. Next, we'll hear politicians like Harris spouting about a universal basic income – effectively Social Security for everyone, a new way for the government to hand every American a monthly check.
These plans would be sold to the masses as a way to close America's wealth gap and help struggling millennials. But the thing is, these actions will ultimately spell disaster for any American who has worked hard and spent years saving or investing.
These types of socialist schemes don't create trillions of dollars of new wealth. They simply redistribute the existing wealth to other people. Don't say we didn't warn you.
New 52-week highs (as of 7/9/19): American Express (AXP), Essex Property Trust (ESS), Hannon Armstrong Sustainable Infrastructure Capital (HASI), Hershey (HSY), Nuveen Preferred Securities Income Fund (JPS), MarketAxess (MKTX), Royal Gold (RGLD), Stryker (SYK), ProShares Ultra Financials Fund (UYG), and W.R. Berkley (WRB).
In today's mailbag, a longtime subscriber has a question about trailing stops. What can we do for you? Let us know at feedback@stansberryresearch.com.
"On the subject of trailing stops, I recall reading some time ago in a Stansberry publication that we should never place the trailing stop order with a broker, but to keep it to ourselves.
"Is this caution still valid? And if so, then when the private stop hits should we then just execute a market order or a more tightly (narrowly) controlled trailing stop order with the broker? Thank you." – Paid-up subscriber Dex F.
Brill comment: Yes, that's correct. We continue to recommend you track your trailing stops outside of your brokerage account, either manually or through a software program like TradeStops.
When a stop is hit on a closing basis, simply place a sell order – preferably a limit sell order – the next day. You can learn more about the risks of placing trailing stop orders in our free Stansberry Research Education Center right here.
Regards,
Justin Brill
Baltimore, Maryland
July 10, 2019