More on Last Week's Historic China Decision
The unintended consequences of the 'Escher Economy' arrive... 'Japan's government bond market grinds to a halt'... More on last week's historic China decision... Don't miss Sjug's next big prediction...
Porter calls it the 'Escher Economy'...
Regular Digest readers know he coined this phrase to describe the modern global economy's "fondness" for central banks, paper money, huge debts, and financial bubbles. As he wrote in the June 9 Digest...
In M.C. Escher's most famous paintings, the viewer can't figure out which way is up...
In his painting "Relativity," a maze of stairs interconnects, each with a different gravity orientation. The paths wind and intertwine. There is no "up" or "down"...
When central banks around the world begin to spend trillions on financial assets, the same thing happens to the world's financial markets. When stocks themselves become the basis of our global financial system... when stocks are the money we use... there's no way to exit the risks of the equity markets.
There's no up. There's no down. There's no limit to the resulting possible inflation. And there's no way to predict when the value of the currency will collapse. When money has no firm value, it's impossible to know what something's actually worth... or if an investment makes sense... or is safe.
Japan is the poster child...
And as Porter explained, perhaps no single economy represents this phenomenon today better than Japan.
Its central bank – the Bank of Japan ("BoJ") – doubled down on quantitative easing five years ago. And it has since become one of the biggest buyers of Japanese financial assets in the world. More from that Digest...
Japan captured investors' attentions when it announced in 2012 that it would vastly increase the asset purchases of its central bank...
The bank wouldn't just buy Japanese government bonds... It would also buy equities. Lots of them: $30 billion or so per year. In an attempt to make sure these purchases weren't politicized, the bank explained it wouldn't buy stock directly (it wouldn't pick stocks). It would only buy via exchange-traded funds that allocate capital according to the structure of various preexisting indexes.
As you'd imagine, this policy has produced a boom. And it has attracted a lot of "hot money" from around the world.
Today, all of that buying has resulted in a mind-bending scenario: The BoJ is the largest owner of Japanese government debt. It now owns more than 40% of the entire Japanese government-bond market. It's also the third-largest holder of Japanese equities in the world, including a top 10 shareholder in one-fifth of Japan's 3,750 publicly traded companies.
'What happens when central banks own the market?'
Naturally, one of the first questions that comes to mind when most folks hear about this is, "How does it all end?" What happens after central banks have "cornered" the markets?
As Porter explained, we don't know – what's happening today is unprecedented. But we do know it won't end well...
You can't print prosperity... So I hope you will keep a careful eye on the markets, and especially on the outlook for inflation. It's coming. But in the meantime, the decision to use the awesome power of a central bank to invest in the stock market won't only hurt investors and "stock jockeys."
Our capital markets are supposed to be "efficient." That is, modern financial theory explains that by allowing capital to be allocated by the inputs of millions of investors, vast amounts of disparate information can be processed and capital can be allocated where it's needed most, so it can be used most efficiently...
My bet is we'll see huge unintended consequences for allocating trillions in capital in such nonsensical ways.
Today, we may already be seeing the first of these consequences...
According to a weekend report from Japanese business newspaper Nikkei Asian Review, Japan's government-bond market has ground to a halt (emphasis added)...
Yields on newly issued 10-year Japanese government bonds remained flat for seven straight sessions through Friday as the Bank of Japan continued its efforts to keep long-term interest rates around zero.
The 10-year JGB yield again closed at 0.055%, where it has been stuck since June 15. This marks the longest period of stagnation since 1994, according to data from Nikkei affiliate QUICK... Trading in newly issued 10-year debt has become so infrequent that broker Japan Bond Trading has seen days when no bonds trade hands.
During its policy meeting that wrapped up last Friday, the BOJ reaffirmed its commitment to continuing monetary easing until Japan reaches its 2% inflation target. That goal remains far off, with inflation stuck near zero.
Why does this matter? Because it's a clear sign that the bond market is no longer functioning properly. As the Nikkei noted...
Fewer participants and financial products could lead to a further loss of market function. If the bond and money markets lose their ability to price credit based on future interest rate expectations and supply and demand, the risk of sudden rate volatility from external shocks like a global financial crisis will rise.
In other words, none of this means a crisis is imminent. But it does suggest the next crisis will be far more severe than it otherwise would be... And millions of investors are likely to be blindsided when it finally begins.
More on Tuesday's historic MSCI decision...
Last week, it finally happened...
Global index provider MSCI officially announced it would add domestic Chinese stocks – known as "A-shares" – to its emerging markets index, just as Steve Sjuggerud had predicted. And Steve shared his initial thoughts on the news with Digest readers last Wednesday.
On Thursday, Steve provided a full update on the news for his True Wealth China Opportunities subscribers, including the most important question going forward: What does MSCI's decision mean for his China recommendations?
Because we know many of you have been following this story closely, Steve has graciously agreed to share a portion of this update with Digest readers today. Here's Steve...
We recommended three investments to take advantage of this announcement and the resulting global shift of investment dollars. Here's how they fared the day after the announcement...
"Wait, that's it? I thought we were supposed to get rich overnight if we got this one right!"
That's not how it works... especially with an announcement of this magnitude. In fact, no index funds will move their money into China until May 2018, based on this announcement. (Of course, hedge funds will "front run" this.)
Looking at the big picture... our thesis is built around a long-term outlook. MSCI's decision has always been the first catalyst to kick off a massive shift of ultimately hundreds of billions of dollars. We got our catalyst, but the money doesn't move overnight.
In fact, as Steve explained, we could see what we call "buy the rumor, sell the news" as early investors take profits...
The news is out on MSCI. So some of our China funds could actually trade lower over the next few weeks – before the uptrend returns.
Don't get discouraged if Chinese stocks don't soar immediately or if our investments head lower in the next couple weeks. The long-term setup is exactly what we expected... And it's exactly what we want.
While these recommendations didn't immediately move higher following the news, Steve did note that there are already some incredibly positive signs...
We're nearly a year away from the first official inclusion in May 2018, but traders are already moving money.
Overnight, money flowing into Shanghai from Hong Kong increased 40% through the Shanghai-Hong Kong Stock Connect – a mechanism launched in 2014 that allows money to move in and out of China. The smart money isn't waiting... They're already buying to get ahead of next year's massive flow of money into these select Chinese A-shares.
We're already perfectly positioned to profit from these moves. And while we haven't seen huge profits yet, we will. This is a long-term story. The first catalyst to this story finally happened. MSCI finally decided to do the right thing. And that's huge for us.
Don't miss Steve's next big prediction...
Of course, as regular Digest readers know, Steve isn't just super-bullish on China today. He also believes U.S. stocks will experience a "Melt Up" – an explosive final inning of the long bull market – over the next 12-18 months.
As we noted last week, Steve will be hosting a live briefing this Thursday, June 29 at 8 p.m. Eastern time to share the latest developments on this situation. And it's absolutely free for all Stansberry Research subscribers. Click here to reserve your spot now.
New 52-week highs (as of 6/23/17): Boeing (BA), Becton Dickinson (BDX), Digital Realty Trust (DLR), Facebook (FB), Fidelity Select Medical Equipment and Systems Fund (FSMEX), JD.com (JD), Johnson & Johnson (JNJ), Annaly Capital Management (NLY), Paysafe (PAYS.L), ALPS Medical Breakthroughs Fund (SBIO), Stanley Black & Decker (SWK), TTM Technologies (TTMI), U.S. Concrete (USCR), Verisign (VRSN), and Weight Watchers (WTW).
In today's mailbag, some great feedback on Steve's China research… and several subscribers respond to the Friday Digest mailbag. Send your notes to feedback@stansberryresearch.com.
"Porter & Steve, just a note to say how pleased I am regarding my portfolio of the China stocks recommended in [True Wealth China Opportunities]. I can see that this is not a short-term profit possibility but a long term one. I am one of the investors that decided to select 19 stocks from this opportunity. Bought 9/16/16 and I am up over 12% overall. Five of them are up double digits from 63% to 24%. The three laggards are down from 4% to 14%. I am one of those investors that will stay for the long term in China. Keep up the great work and suggestions." – Paid-up Stansberry Alliance member Steve Lupie
"I have invested in several China recommendations. I am up… 20%... 11%... 6%... 41%... 30%... 2%... 24%... In for the long haul." – Paid-up subscriber Joel Gelbman
"Porter, et al, it always strikes me as absurd when people criticize your research. The recent PhD letter was especially funny. I have subscribed at a basic level since about 2005 I think and have only bought more...including joining the ultimate level in early 2017 (7 or so years too late, as I paid 4 times what I could have when it was first offered). Like you always say on Friday... 'there is no teaching...'
"Anyway, just want to let you know as a 1985 graduate of the working man's college in Orlando, UCF, that not only have I profited from your work monetarily, but also personally. I try to read all of the various dispatches every day and only have so much 'dry powder', but my recent investment into your business will benefit me and my children for many, many years. Thanks for all you do along with ALL of your valuable 'others' including Steve, Doc and several more! I hope the next ten years are as good to all of your subscribers as the last ten have been to me and my family." – Paid-up subscriber Lance Featherngill
"Even though 'we' might think a bond is safe at the time it trades at par, 'anything can happen!' (And I've seen it happen!) Getting out early at par is FAR safer than holding to continue collecting the interest." – Paid-up subscriber Carl Sopchak
"Re: [Friday's] Digest (23 June 2017)… In time, your subscriber Ted H. will learn how to use your Credit Opportunities letter. Maybe he won't always follow your sell signals, even when he understands their rationales. I haven't myself – I still own some of the NRP bonds, for example. One does have to adapt to one's own situation.
"My only complaint is that your recommendations in Credit Opportunities tend to run away from me. I live on the West Coast; I am always late to the party; and for one reason or another, I have established positions in only six of your 17 recommendations. But I can't really complain. I was able to double down on the NRP bonds a couple of months later, at fantastic prices. I was finally able to get into the Sears bonds just this month — talk about being late to the party! And although you may have booked a small loss on the Atwood bonds, I was on vacation and didn't even see your sell recommendation until after they were selling above par on May 31st. So I made a profit on those, too. I like your remark about the coming feast." – Paid-up subscriber Lew Randall
"This is why I am a subscriber. Porter, you take the time to be so clear. I am a Flex Alliance subscriber who has never bought a bond. Your writings and roll out of Credit Opportunities was a huge learning experience for me. I totally understand your response to subscriber Ted's question. Two years ago, it would have been all Greek to me. Margin account requirements and cash has hindered my buying bonds. But timing maybe on my side. In a year more cash will be available to take advantage of future Credit Opportunities recommendations. Thanks." Paid-up subscriber Tim Baranski
Regards,
Justin Brill
Baltimore, Maryland
June 26, 2017