Central Banks Have Gone Mad
Central banks have gone mad... The 'perversion of capitalism' extends far beyond negative interest rates... The real reason easy-money policies are here to stay... You don't have to wait for a crisis to make big money in bonds...
It's a shocking figure...
Thanks to the world's central banks, there is now a record $13 trillion of negative-yielding debt trading around the world.
As we noted yesterday, we expect this figure will continue to grow. And this should be an incredibly bullish tailwind for gold.
However, as the Stansberry's Investment Advisory team recently reminded subscribers, negative rates aren't the only way central banks are manipulating the markets today. As they wrote in the July issue, published last Friday...
Since the financial crisis in 2008 and 2009, the Federal Reserve has had three rounds of quantitative easing (QE) stimulus. QE basically involves the central bank buying securities from the market and holding them on its balance sheet. The Fed's QE programs involved buying U.S. Treasury and mortgage-backed securities.
The Fed's balance sheet reached a maximum size of around $4.5 trillion around the time the third round of QE ended in late 2014. It has since shrunk to around $3.8 trillion, as the Fed has let some of its holdings mature without reinvestment.
Not to worry... The other central banks have more than picked up the slack for the Fed. The [European Central Banks ("ECB")] has bought eurozone sovereign bonds. But its QE has also involved buying corporate bonds.
The easing directly lowers the cost of capital for companies... and not just in Europe.
Even companies in the U.S. are taking advantage of Europe's negative rates and the cheap cost of capital. Many have issued bonds denominated in euros.
For example, Ford Motor Credit – the financing arm of the carmaker Ford Motor (F) – issued 1 billion euros worth of bonds last month with a coupon of 1.5%.
As they noted, these rates could never exist in a healthy, free market...
Yet, thanks to the ECB, the financing arm of a U.S. automaker can actually borrow money at a lower rate than the U.S. government can. Let that sink in for a moment.
Meanwhile, the other major central banks have been plenty busy as well. More from the issue...
Through its own QE program, the [Bank of Japan ("BOJ")] owns around half of all of the Japanese government bonds outstanding. The BOJ also purchases stocks in the form of exchange-traded funds (ETFs).
The Swiss National Bank ("SNB") doesn't even bother with ETFs. It buys stocks directly and has a $91 billion equity portfolio. Its largest holdings are U.S. companies: Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN).
All told, these four central banks now hold about $16 trillion of assets on their balance sheets. And as you can see from the chart below, the pace of aggregate buying even sped up after the Fed stopped QE...
Again, all this has happened without the Fed. But that may not be the case much longer...
Now that the U.S. central bank is expected to kick off a new rate-cutting cycle later this month, we fear it's simply a matter of time before it also begins a new QE program of its own.
Unfortunately, as the Stansberry's Investment Advisory team explained, these policies have come at a tremendous cost...
It's no secret that wealth inequality has skyrocketed in the last decade.
Many folks have taken to blaming capitalism for these problems. In fact, as we detailed in our book The American Jubilee, we expect this to be a major issue in the upcoming U.S. presidential election.
However, the reality is that it's this manipulation – this "perversion" of capitalism, as they called it – that is actually driving much of this trend.
In short, central bank stimulus is great for stock prices... But the average American doesn't own any stocks.
All this begs the question...
If these perversions do little to improve the real economy – and only worsen the divide between the "haves" and the "have nots" – why do central banks continue to pursue them? The real reason should sound familiar to regular Digest readers: It's debt. More from the July issue...
The economy hasn't deleveraged since the financial crisis... The central bankers haven't let it.
Deleveraging by defaults is a painful process... Companies go bankrupt. People lose their jobs and stop paying their debts. Home prices decline. The economy contracts, and more companies go bankrupt. And politicians get voted out of office.
So central bankers have continued the stimulus to prevent defaults and to try to spur inflation. But inflation continues to miss their targets. The endgame for them is much higher inflation. And they don't care if they destroy fiat currencies in the process.
You've no doubt heard us talk about our debt problems... In total, U.S. debt has reached $72 trillion. This includes household, corporate, and government debt.
Total U.S. debt reached 380% of GDP during the Great Recession. It has only pulled back to around 350% today. The U.S. economy is still highly leveraged by historical standards.
The rest of the world is in the same boat... Debt is why the perversions will continue.
Of course, this doesn't mean they'll be successful...
As Porter has explained, you can't solve a debt problem with more debt. Stimulus or not, the reckoning can't be delayed forever. Sooner or later, these bad debts will be wiped out. And tremendous opportunities will be available to investors who know where to look.
Longtime readers know some of the best opportunities will come from the corporate bond market...
We expect the coming crisis will make it possible to buy high-quality bonds for potentially pennies on the dollar. And we launched an entire service – Stansberry's Credit Opportunities – specifically to take advantage of these opportunities.
But if you've been waiting for the end of this boom to learn more about this strategy, there's something you should know...
You don't need a crisis to make big, safe returns in corporate bonds.
Sure, we expect to find the best opportunities after the real trouble begins. But our colleagues Mike DiBiase and Bill McGilton have already helped Stansberry's Credit Opportunities subscribers earn some impressive returns over the past few years.
Since we launched this service in late 2015, the Stansberry's Credit Opportunities team has racked up an impressive 85% win rate on recommended bonds... good for an average annualized return of nearly 21% on closed positions.
That's more than double the return of the overall high-yield corporate bond market. It even beat the return of the stock market over the same period.
In fact, we recently heard from one Stansberry's Credit Opportunities subscriber who used this strategy to help him retire early at age 52. We were so impressed with his story, we agreed to let him go on camera to share it directly with our other subscribers. Click here to see for yourself.
New 52-week highs (as of 7/10/19): First Majestic Silver (AG), American Express (AXP), First Trust Nasdaq Cybersecurity Fund (CIBR), Dollar General (DG), Disney (DIS), Enterprise Products Partners (EPD), Essex Property Trust (ESS), General Mills (GIS), Barrick Gold (GOLD), Hannon Armstrong Sustainable Infrastructure Capital (HASI), McDonald's (MCD), MarketAxess (MKTX), Microsoft (MSFT), Motorola Solutions (MSI), Nuveen Municipal Value Fund (NUV), NVR (NVR), PepsiCo (PEP), Royal Gold (RGLD), Starbucks (SBUX), Stryker (SYK), and T-Mobile (TMUS).
A quiet day in the mailbag. As always, send your comments, questions, and concerns to feedback@stansberryresearch.com. We can't provide individual investment advice, but we read every note.
Regards,
Justin Brill
Baltimore, Maryland
July 11, 2019