Currency wars raging... Why Australia cut rates... Negative yields the new normal... Germany borrowing more cheaply than Japan... Munis still soaring... Doc correctly predicts BP's next move... Where to find income today...
As if its currency wasn't suffering enough, Australia decided to join the global currency wars...
In both last Monday's and Friday's Digests, we presented charts of the plunging Aussie dollar. As we explained yesterday:
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Australia's economy is closely tied to commodities. The country is dependent on iron ore, oil, aluminum, gold, copper, etc... All of which, save gold, have been crushed.
Australia is also heavily dependent on exports to China, the world's largest commodity consumer. And China's economy has been slowing.
This, combined with a soaring U.S. dollar, all adds to a collapse in the Australian dollar...
In hopes of stoking the economy, the Reserve Bank of Australia cut its benchmark interest rate by 25 basis points to a record-low 2.25%.
The markets, turning a blind eye to the decreasing effectiveness of quantitative easing, sent Australian stocks to their highest level since May 2008. Remember, a weaker currency means cheaper Australian exports.
The Aussie dollar plunged to its lowest level in six years compared with the U.S. dollar...
But rates in Australia could still have further to fall, as more and more sovereign yields go negative. From the Wall Street Journal:
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According to the same article, there are now $3.6 trillion of negative-yielding bonds in the world – 16% of the global government bond market.
One would think negative bond yields would scare buyers away... But some investors are buying these bonds betting deflation will be greater than the current, negative yields on these bonds – which would cause prices to rise as yields fell further.
There's a ton of capital in the world today... And that money is looking for the safety of government bonds – even if yields are negative
We like trades where the downside is limited, but the potential upside is immense. Buying bonds today is the opposite situation...
We doubt yields could fall much further into negative territory... But when rates rise, they could skyrocket; wiping out bondholders.
Before sharing what these negative yields mean for you, let's look at one more statistic...
The yield on Germany's 10-year bund fell to 0.306% today, dropping below Japan's 10-year yield of 0.335% for the first time in history.
Consider what that means... Japan has been battling deflation since the 1990s. And it has become one of the most indebted countries on Earth. Even with "Abenomics" – our name for the current prime minister's vow to beat deflation via Fed-like easing – Japan is failing.
Yet right now, investors take an even bleaker view of Europe. The government debt of Germany – Europe's economic engine – is priced as though investors expect it to endure the kind of stagnant economy Japan has suffered for decades.
So as we've said numerous times this year, low and negative sovereign yields are bullish for gold.
Investors often dismiss gold as an asset because it pays no yield... It simply sits in your safe. Now, gold can sit in your safe and not deplete your wealth – as holding certain sovereigns would.
Whether you like to own physical gold or you simply like to trade the metal... it's looking bullish today. For more reasons why we're bullish on the precious metal, you can re-read yesterday's Digest and the January 19 Digest.
We also wouldn't be surprised to see Treasury yields fall further. The 10-year Treasury yield is 1.74% today... compare that with 0.31% for Germany.
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Low interest rates have also been a boon for anyone holding municipal bonds.
We won't go into the bull case for muni bonds today. We've written plenty about them in the past. In short, muni bonds are debt issued by state and local government used to fund projects. Because you're loaning money to the government, the yield is usually tax-free.
Munis are traditionally one of the least sexy sectors of the market. They pay safe income and rarely default. But some doomsayers took aim at muni bonds during the subprime crisis, saying we'd see loads of defaults.
Doc took the other side of that bet. And Retirement Millionaire subscribers who purchased municipal bonds when Doc originally recommended them in October 2008 (in the midst of the economic crisis) are up more than 100% – a huge gain considering the asset class.
As you can see from today's "new highs" list, it's all munis...
Doc is still bullish on munis today. You can still find muni bond funds trading at a discount to the value of their holdings and offering tax-equivalent yields of between 6% and 9%. That's a stellar yield for such a safe asset... especially considering today's alternatives.
Another one of Doc's top income recommendations, oil giant BP, announced earnings today.
We wrote about BP in the January 7 Digest. The company was getting pummeled due to falling oil prices and its ownership stake in Russian oil firm Rosneft. The market feared Rosneft's value was impaired and, given the plunging ruble, its payments to BP would decline. The market was also worried BP would cut its dividend.
Doc explained why BP's investment in Rosneft was fine, why BP would maintain its dividend, and why the company was better-positioned to maintain its dividend than many of its peers... And Doc was right on.
I'd recommend reading the short bit from Doc before continuing. It was a contrarian (and as you'll soon see, incredibly accurate) call.
BP announced a net loss of $4.4 billion in the fourth quarter of 2014, mainly attributable to the $5.5 billion in write-offs on the value of its North Sea and Angola assets due to falling oil prices.
BP's earnings excluding inventories and one-offs, an important metric, was $2.2 billion... That's down 20% from a year ago, but still above expectations.
The positive result was due largely to a $470 million profit from Rosneft... Many analysts were predicting BP would lose up to $750 million in the quarter from its stake in Rosneft.
In general, the market was happy with BP's efforts in the face of falling oil prices. The company instituted budget cuts, wrote down assets, laid off employees, and cut capital spending (as Doc predicted it would).
"Our focus must now be on resetting BP: managing and rebalancing our capital program and cost base for the new reality of lower oil prices," BP CEO Bob Dudley said in a statement.
BP said it would reduce capital spending to $20 billion from around $23 billion in 2014.
The company paid a quarterly dividend of $0.10 a share, which is up 5% from the same period a year ago and flat from the third quarter. And the CEO reconfirmed his commitment to the dividend...
"Throughout the work to reset BP, the dividend remains the first priority," Dudley said.
Shares are up nearly 3% on the news... And the stock is still yielding 6.2%.
We've only highlighted two opportunities for big income in today's Digest. And, despite the horrible interest-rate environment, it's still possible to generate healthy income in today's market... You just have to know where to look.
The current central bank policies are meant to turn everyone into a speculator... Low and negative interest rates force you out of savings and into risky assets. It's punishing the savers... The people who have worked their entire lives and not been reckless with their earnings.
The government has succeeded in one regard... You can't generate income in traditional safe assets like CDs or Treasury bonds. But you don't have to play their game... You still have plenty of ways to generate 5% or more on your money without much risk.
And luckily, we have one of the best income analysts in the world, Dr. David Eifrig, on our team... And in his service Income Intelligence, he looks across the globe and all asset classes to find the highest-quality and highest-yielding securities out there.
We think the work Doc produces in Income Intelligence is so important, we want every investor to read it. That's why we've priced it at an absurdly low $49 a year. And if you don't like it, we'll give you a full refund... no questions asked.
If you have any money saved, you can't afford not to read Income Intelligence... It's the best income investment service on the market.
And Doc just produced a new special report about "hidden income." He explains ways you can generate safe income from places you'd never expect.
If you'd like to sign up for Income Intelligence for only $49, without watching a long video, click here...
New 52-week highs (as of 2/2/15): Nuveen Quality Preferred Income Fund 2 (JPS), Nuveen AMT-Free Municipal Income Fund (NEA), and Nuveen Municipal Value Fund (NUV).
In today's mailbag, lots of questions about gold. One reader wants to know what type of gold he should purchase. We asked a leading expert on the topic for his thoughts. And our Editor in Chief fields a question on the metal's price and its strength relative to the dollar...
Are you thinking about buying gold? What has your experience been in the past? Let us know here... feedback@stansberryresearch.com.
"I have decided to get physical gold. Porter, what would be the ideal coin to purchase?" – Paid-up subscriber Ken Keller
Goldsmith comment: In last Friday's Digest, Porter said he likes to buy bullion and collectible coins with low premiums to melt... I feel the same way.
We asked Van Simmons, President of David Hall Rare Coins and co-founder of the Professional Coin Grading Service (the foremost grader of collectible coins), about some values in the market today.
Van said one of the best deals today is in brilliant, uncirculated St. Gaudens.
Historically – about the last 50 years – until two years ago, these coins traded at around a 75%-125% premium over the spot price of gold. So, if gold was $2,000 an ounce, these coins would sell for about $4,000.
Now he's buying St. Gaudens for $1,364... About an 8% premium to the spot price.
He thinks the best place to start is with generic, brilliant, uncirculated collectibles like that. These collectible coins are much more leveraged than the price of gold. According to Van, if gold stays where it is, the premium will probably come back over the next 10 years. If gold soars, so will the value of these coins.
If you're interested in purchasing any collectibles, you can reach Van at 800-759-7575.
"I would have liked to see more of an explanation of why gold is moving higher WITH the dollar. Most of what I have read the past year as an Alliance Member is gold typically moves OPPOSITE of the dollar. Thanks." – Paid-up subscriber Marty G.
Brian Hunt comment: Why did gold put in a bottom in the $1,140-$1,200-per-ounce area while the U.S. dollar was soaring? It's a great question. While moves in gold are traditionally counter to moves in the dollar, the extraordinary currency debasement we've recently seen in Europe and Japan (which we wrote about here) are a special factor in gold-price movements.
The debasement efforts in Europe and Japan are so strong that global investors are buying gold, an alternative currency. This has allowed gold to advance in the face of the dollar's rally. It's bullish price action for the precious metal.
Regards,
Sean Goldsmith
February 3, 2015
