This Chart Means Big Trouble for Bonds
Inflation is 'surprising' for the first time in years... A concerning 'side effect' of the Fed's QE program... The Fed has no choice but to push rates higher... This chart means big trouble for bonds... Don't miss your free investment 'master class'… P.J. O'Rourke on Trump's first mistake...
Inflation is now rising faster than expected for the first time in five years...
Investment bank Citigroup's so-called "Global Inflation Surprise Index" has been surging higher in recent months, along with consumer prices.
In simple terms, the index compares actual consumer price data – what most developed countries use to measure "inflation" – with the market's expectations. Values above zero indicate data are coming in above expectations, while values below zero indicate data below expectations.
As you can see in the chart below, the index turned positive in December – meaning inflation data around the world were higher than expected – for the first time since early 2012...
In other words, after years of falling short of analyst expectations, global inflation is suddenly moving much faster than predicted. This is another sign the recent rise in prices could be the start of a more significant move than we've seen of late.
As we've discussed, a return to inflation should be bullish for precious metals and equities (at least initially)... and absolutely terrible for bonds.
Speaking of bonds, this morning, the Wall Street Journal highlighted an unusual consequence of the Federal Reserve's program of quantitative easing ("QE")...
As longtime readers may recall, the Federal Reserve bought up trillions of dollars' worth of bonds in the years following the financial crisis of 2008.
The Fed stopped buying new debt in 2014, but it still holds more than $4 trillion in debt, including nearly $2.5 trillion worth of Treasury securities. This number has been fairly stable for two reasons...
First, the Fed holds mostly longer-term debt, meaning relatively little of this debt has matured. And second, the Fed has been reinvesting the cash from maturing bonds back into new Treasury debt.
But there's more to the story...
The Journal notes that the average duration of the Fed's Treasury holdings has fallen from nearly eight years in 2014 to just six years today. In other words, the Fed has been reinvesting in relatively shorter-term debt than it had been. And this has helped push interest rates higher.
According to Fed Chair Janet Yellen, this has had the same impact on benchmark interest rates as if the Fed had raised short-term rates two additional times.
Why do we bring this up?
Because this trend could soon accelerate significantly...
According to the Journal, the Fed is now in discussions to cut the size of its bond portfolio for the first time. In practice, this means it will stop reinvesting the cash from maturing bonds back into Treasurys. This would put even more upward pressure on rates.
Worse, as you can see in the following chart, a huge chunk of the Fed's Treasury debt is set to mature over the next five years...
The amount of maturing Treasury debt is expected to rise to $190 billion this year, followed by an enormous $450 billion in 2018, $410 billion in 2019, and more than $200 billion per year in 2020, 2021, and 2022.
But as you can see above, analysts estimate the Fed will reinvest a little more than half of 2018 maturing debt, and little to none in the following years. This would require the private market to absorb up to $1.2 trillion of additional Treasury debt.
The massive supply could easily overwhelm investor demand and cause Treasury prices to plunge... and rates to absolutely soar.
This chart is also horrible news for financing-dependent companies...
And in particular, highly leveraged firms that need to refinance in 2018 and 2019 – like many of those in the Stansberry's Big Trade "Dirty Thirty" – should be downright terrified.
Even investment-grade firms could be forced to pay unusually high rates to borrow, while many lower-quality credits will likely be shut out of the market altogether.
In short, despite the recent rally, the looming problems in corporate credit that Porter and his team have warned about haven't suddenly disappeared. A crisis is approaching... Only the timing remains uncertain.
In the meantime, we continue to recommend avoiding most lower-quality bonds and bond funds...
We believe investors are taking far greater risks than they realize in these investments. But we remain cautiously bullish on equities...
Sooner or later, a crisis is certain. But the final, most explosive "inning" of this long bull market could still be ahead.
As we've discussed, inflation is already stirring. And despite recent controversies, the new Trump administration could still successfully stoke economic growth. Just cutting taxes and regulations alone could do wonders. Stocks – particularly high-quality, small-cap stocks – could soar before the bull market ends.
If you're interested in learning more about how to find high-quality stocks like these...
Stocks that could ultimately become "the next Starbucks" or "the next Apple"... you're in luck.
Our friend Chris Mayer – chief investment strategist at our corporate affiliate Bonner & Partners – is hosting a special "master class" training event this Saturday, February 4 at 3 p.m. Eastern time. And it's absolutely free for Stansberry Research subscribers.
Longtime subscribers know Porter has called Chris one of the few truly great investors he's ever met. And that's not hyperbole... An independent audit of Chris' actual track record shows he outperformed legendary investors like Carl Icahn and George Soros – and even the book value of Warren Buffett's Berkshire Hathaway – by as much as 2-to-1 over a 10-year period.
Chris has prepared three short introductory videos covering everything you need to know in advance of this weekend's training. Click here to see today's free presentation.
New 52-week highs (as of 2/1/17): Apple (AAPL), Bancroft Fund (BCV), CommScope (COMM), Altria (MO), and Turquoise Hill Resources (TRQ).
In today's mailbag, early feedback on our just-launched Stansberry Portfolio Solutions product is already rolling in... We share a note on the market's "fear gauge"... And several more subscribers respond to Steve Sjuggerud regarding brokers and exchange-traded funds. Send your letters to feedback@stansberryresearch.com. And be sure to read on for a brand-new essay from Digest contributing editor P.J. O'Rourke.
"Porter... Wow. The new Total Portfolio is a lot more than I expected. I can see the wisdom in the diversity of the recommendations and the positioning sizes. I have been following many of the newsletters for several years, and my portfolio reflects the recommendations you have made, as well as Steve, Doc, and Dan. What really is a surprise to me is how many of the recommendations in the Total Portfolio that I do not currently hold. I'm all in, so I have some work to do... Thank you for all of your hard work." – Paid-up subscriber John H.
"Good morning, I am a lifetime Alliance member since 2005, I believe. It has been the best money I have ever spent. I have never sent feedback before, but I just wanted to say Thank You!
"All of the value provided by Stansberry year after year after year has reaffirmed my decision to become a lifetime member. And that was before [Stansberry] Portfolio Solutions. I missed the webinar event, and I had no idea it would be included with my membership. I thought it was an excluded service which would have been totally understandable. But to see it pop up in my inbox was a very welcomed surprise... I'm thrilled to receive it. Again thank you!" – Paid-up subscriber Chris M.
"To Porter and Company, very quickly, I think your new [Stansberry] Portfolio Solutions is a grand idea... Also, the new app is a fantastic idea... Please continue your fantastic work!" – Paid-up subscriber B.R.
"The portfolios are terrific!... Thank you." – Paid-up Stansberry Alliance member Nathan M.
"Thank you all for launching Stansberry Portfolio Solutions. I can't wait to get started. This is exactly what I have needed since firing my investment advisor. Looking forward to prosperous years ahead. Thanks again." – Paid-up Stansberry Alliance member Jim M.
"Love the Stansberry Newswire! Perfect length, and engaging! Not dull and dry, like these services tend to be." – Paid-up subscriber Stacey M.
"Wow! That VIX study by Ben Morris is powerful! I can't tell you how many times I've tried to short as the VIX gets so low! That really helps. Thanks!" – Paid-up Stansberry Flex member Carlos
"Hello, you probably already know this, but if not Fidelity offers a lot of ETFs w/ zero trade commissions. Info that the person looking for a new broker might appreciate. Cheers." – Paid-up subscriber John D.
"I have purchased several of Steve's recommended ETFs via Schwab without any difficulty." – Paid-up Stansberry Flex member M. Noble
"One of my Brokers Wells Fargo has disallowed several recommended purchases based on Stansberry advice over the years. These attempted purchases are not in an IRA. The most recent one was LTL. When called, they mostly plead ignorance saying someone 'On High' has decided this etf is not appropriate for their customers. No real reason.
"I also have an IRA at Interactive Brokers. They have not turned down any of my purchases for stocks or ETFs, only the occasional bond... but they have begun rumblings about leveraged etfs not being appropriate for IRA accounts and what they say seems to be coming from some governmental pressure or oversight." –Paid-up Stansberry Alliance member John P.
Regards,
Justin Brill
Baltimore, Maryland
February 2, 2017
Trump's Entry Visa Restrictions and the Problem of Political Decision-Making
Donald Trump has only been a politician for a little while. And given the way he campaigned against politics-as-usual, political correctness, and the political establishment in general... Donald Trump didn't really become a politician until he took the oath of office as president of the United States.
But the presidency is, for sure, a political office. Once you're president, you're a politician, whether you like it or not. Every decision you make is viewed as a political decision. And in my view, politics is a bad method of decision-making.
Politics ignores individuals and their liberties. The purpose of politics is always to increase political power. Every political decision is against individuals and in favor of politics. Politics is a football ref whose every penalty call gives an automatic first down to the referees instead of the football players.
Of course, individual decisions can be bad too – my first marriage, for example. But just one person (or two, counting her lawyer) were mad at me. Political decisions have larger ramifications. "Who gets the house after the divorce?" is of little long-term historical significance compared with "Who gets the House of Representatives after 2018?"
It only took Donald Trump a few days of being a politician to fall prey to politics. He made a political decision – a highly political decision. Like most things that are highly political, it was a screw-up.
A 120-day ban has been imposed on refugees from everywhere in the world. I have a Republican friend who's in the hostile territory of lefty Portland, Oregon. Does this mean he can't leave? Will he be marooned for the next four months in a place where everybody hates him and there's nothing to eat but GMO-free, locally sourced, fair-traded, artisanal vegan tofurky?
A 90-day ban has been imposed on visitors from Iraq, Iran, Sudan, Somalia, Yemen, and Libya. Do we get a lot of tourists from Yemen and Libya?
At first, the prohibitions were also applied to holders of green cards, who are legal residents of the U.S. Then someone noticed the "legal" part of the phrase "legal resident" and the decision was reversed in a great flurry of bureaucratic confusion.
This is one objection to politics as a method of decision-making. All political decisions result in a great flurry of bureaucratic confusion. Bureaucracies are easily confused. But in the private sector, bureaucracy serves an administrative purpose. In politics, bureaucracy IS the administrative purpose.
Politics isn't "a means to an end" for individuals. Politics is "a means to the end OF individuals." Don't look for help from politics. If politics were the IT department you wouldn't call them because your computer crashed. They'd call you to crash your computer.
More severe than any freeze-up on a laptop was what happened to a number of previously vetted and approved refugees and other travelers surprised and stranded by a sudden political decision.
This was, at best, unkind. (And let us hope it doesn't prove tragic for some of those affected.) But since when did kindness have anything to do with politics?
Personal decisions may be cruel, but at least they're personal. Politics, by its collectivist nature, moves us away from persons and into the realm of the cold-blooded. A journalist covering political decision-making is like a herpetologist studying the feeding habits of crocodiles: Kindness is not a concept that figures into the analytical equation.
But effectiveness does. Political decisions can be judged by their effects. And I don't see how this decision will produce any good ones.
We have temporary executive orders barring a small number of people from a somewhat random list of places. (A list that, notably, does not include any of the places the 9/11 terrorists came from.)
True, the executive orders fulfill a political promise. But does the word "promise" belong in the same sentence as the word "political" any more than the word "kindness" does? If a promise is political it is, by definition, a promise that considers individuals to be meaningless. Is there anything meaningful about keeping a meaningless promise?
The executive orders sound like a loud call to action. It's as if a fire alarm has been pulled. A fire alarm is a loud call to action. But what if you pull the fire alarm in a building that's miles away from the fire?
In that case, it's just noise. I'm afraid the noise will be distracting to members of the Trump administration who are trying to put out real fires.
Nobody doubts that America's immigration system needs emergency attention. But the most problematic aspect of immigration is the illegal part. When people are illegal immigrants, they haven't gone through America's immigration system. They haven't gone through any system. There is no system.
You can't fix something that doesn't exist, no matter how many executive orders you sign. I realize that more stringent border control is on the Trump administration agenda. But in the meantime, one drug smuggler wading across the Rio Grande with a backpack full of fentanyl poses more danger to America than any number of people stuck in airports.
The effect of the political decision to impose temporary travel restrictions is mostly nil except for one thing. What isn't nil is the encouragement given to nihilists. Their huge political anger has been allowed to coalesce around this relatively small political issue.
All sorts of malcontents and sore losers with a vague and unfocused hatred of the Trump administration have – unnecessarily – been given a specific focal point for their wrath.
President Trump can be commended for the speed at which he has undertaken major construction work on American regulatory, tax, trade, and indeed, immigration policy. But he should be reminded that, when you're holding the nail of power between your thumb and your forefinger, don't go handing out hammers to your enemies.
Regards,
P.J. O'Rourke