This Week in Barrons – 4-30-2017:
“Who knew that being President would be this hard?”… Pres. Donald Trump – 4.28.2017
Markets can NOT go Down:
The ‘Trump Trade’ is at the point of being over the moon. But there are so many things connected to the equity markets, that if the markets were allowed to fall, the ripple effect would be huge. There are pensions, insurance companies, and sovereign wealth funds (to name a few) that count on the markets being stable to always rising – but there’s more to this story. First, let’s review our numbers:
- 1 Billion = one-thousand Millions,
- 1 Trillion = one-thousand Billions,
- 1 Quadrillion = one-thousand Trillions,
- $1 Trillion = U.S. Credit Card Debt,
- $1.4 Trillion = U.S. Student Loan Debt,
- $3.4 Trillion = U.S. Annual Tax Revenue,
- $14.4 Trillion = U.S. Mortgage Debt,
- $19.0 Trillion = U.S. Annual GDP,
- $19.9 Trillion = U.S. National Debt, and
- $628.8 Trillion = Currency and Credit Derivatives.
The world runs on credit. Virtually everything you see from the moment you get up in the morning is only there because of some form of credit. 97% of all houses are financed via mortgage credit. All of the roads were financed via a township bond sale – that’s credit. The gasoline held in storage tanks was financed via the futures spot market – that’s credit. The truck that delivered the gasoline was part of a fleet financing deal along with the 30-year lease that the convenience store has with the gasoline company itself – that’s credit. Somewhere in virtually every supply chain, credit has been applied – and make no mistake, if credit stops – everything stops.
That is why Warren Buffet called credit derivatives the "financial weapons of mass destruction." The Bank of International Settlements(BIS) is showing $700 Trillion in global credit derivatives, and if you add in credit default swaps and other instruments – the total derivative market is about $1.5 Quadrillion.
A derivative (simply put) is a contract between two parties whose value is determined by changes in the value of the underlying asset. Those assets can be bonds, equities, commodities or currencies. The majority of the contracts are traded over the counter – where details about pricing, risk measurement and collateral are less ‘transparent’ to the public. In other words, a derivative does not have any intrinsic value, and is essentially a ‘side bet’. People are betting on anything and everything, with Wall Street acting as the largest casino in the world. After the last financial crisis, our politicians promised us that they would do something to get derivative trading under control, but instead the size of the derivative bubble has reached new all-time highs – with the top 25 U.S. banks having more than $236 Trillion in derivative exposure.
To bring this into perspective, let’s say you’re a pension fund manager and you’re worried about the value of your stock investments because they are now well over $20 Billion. So, you go out and buy a derivative contract (maybe a lot of ‘put options’), to use as an insurance policy against your stock portfolio going down in value. The organization from which you bought the derivative contract doesn't want that risk on their hands, so they sell your contract to another organization – and that goes on and on. Just like each single ounce of SILVER on the COMEX exchange now has over 300 paper claims against it – that single pension plan derivative has approximately 200 contracts written against it.
Now, suppose the derivative contract was written in such way that: “XYZ company agrees to make ‘whole’ the entire pension fund, if the underlying stock portfolio falls by more than 25 percent in any 3-month period". Then say the market falls by 26 percent, and triggers that derivative contract. The first organization that wrote the derivative contract is going to say: “Sorry, we've sold that contract to ABC company”. And it just so happens that ABC company figured that the market would NEVER drop by more than 25 percent - so they sold bets AGAINST the entire portfolio dropping that much to an average of 22 other companies and pocketed the premiums. Hopefully the premiums that they collected are enough to pay off the original pension fund, but normally they are NOT. And that’s just one little pension plan. There are over one quadrillion derivatives out there; therefore, any drastic fall in the markets would trigger a systemic collapse the likes of which have never been seen.
Then there is the credit creation piece. If you have a portfolio of stocks, you can use that portfolio as collateral to create credit. The higher stocks go, the more credit that can be created. And leave it to Wall Street to pervert this concept as well. If you can use your portfolio as collateral to create a $1B in credit with one lender, then why not use that same portfolio to create the same collateral at (on average) 10 different lenders?
With this much counter party exposure (and trails no one could ever follow) it now makes sense why the easiest solution to our credit derivatives problem is just to have our Central Banksters keep this market up – at all cost. The constant need to ’Feed the Beast’ with ever more credit – demands that Central Banks continue to purchase financial assets. If they don’t, this all stops and we enter an outright depression. After all, Central Banksters didn’t purchase over $1 Trillion worth of stocks and corporate bonds in Q1 because they were good investments. They bought them to keep the ponzi scheme from crashing.
So, what’s to stop the markets from rising to the moon? Not much really. Maybe the Central Banksters will decide not to play anymore and stop their buying – then markets will fall. And if they wanted to be nefarious and take down the world – all they’d have to do is start selling assets. Some believe that's exactly the reason why Donald Trump was ‘allowed’ to be President. The theory is that ‘the powers that be’ put Trump in office because they're going to pull the plug on the global economy – press the ‘reset’ button, discharge all debts, revalue all currencies, and we just start over. Until that time comes, we continue to rise higher, and the Trump Trade is alive and well and going to the moon.
“Nothing is for certain except death and taxes, and now they’ve changed that!”
This week (courtesy of SK) President Trump unveiled his tax reform outline that called for: dramatic tax cuts, a simplification of the tax code, and even changes to the inheritance tax. His outline proposed lowering the individual tax rate, doubling the standard deduction amount, halving the corporate tax rate, modifying the tax treatment of pass-throughs, expanding child and dependent incentives, and eliminating both the alternative minimum tax and the federal estate (death) tax. The announcement said nothing about incentives for infrastructure spending, or the controversial ‘border adjustment tax’.
- For Individuals, the proposal replaces and lowers the current individual tax rates from 10, 15, 25, 28, 33, 35, and 39.6 percent – to a three-bracket range of 10, 25, and 35 percent.
- For Deductions, the plan would eliminate all individual tax deductions except for the mortgage interest deduction and the charitable contribution deduction.
- For Family Incentives, the proposal calls for unspecified tax relief for families with child and dependent care expenses.
- For the Estate Tax, the plan calls for elimination of the federal estate tax.
- For the Alternative Minimum Tax (AMT), the proposal calls for abolishing the AMT, calling it a complicated and unnecessary addition.
- For Businesses, the plan calls for cutting the corporate tax rate from a high of 35 percent – to a flat 15 percent rate.
- For Small Businesses, the proposal calls for a 15 percent tax rate for pass-through income.
- And for Repatriation, the plan calls for a one-time tax on repatriated profits at a yet-unspecified tax rate.
This week was also the first view of our nation’s growth rate. GDP (Gross Domestic Product) is the single leading economic barometer for each nation. In the history of economic rebounds, the past 8 years in the U.S. have been among the slowest in GDP growth. For all of 2016, the U.S. GDP only expanded at 1.6 percent - the slowest pace of expansion in a five-year period. So, this week we had our first glimpse at GDP estimates, and the number came in at +0.7 percent. Inside the number the details were horrible with employment costs soaring and consumer prices rising well above their estimates. The widely tracked GDPNow model from the Atlanta Fed showed that economic expansion slowed to an even slower pace of 0.2 percent. The Atlanta Fed went on to say that the first quarter real consumer spending growth FELL to 0.1 percent and durable goods sales FELL 1.11 percent.
As for the equity market, after those two monster up days on Monday and Tuesday, the market ran smack into the resistance of the all-time highs posted on March 1st. Last week I suggested that they might have some issues getting up and over that hurdle and Wednesday, Thursday and Friday showed that to be true. It isn't unusual for a market to struggle when trying to overtake an all-time high, and they might just be bouncing us along sideways as they regroup for another shot at it. But we do need to consider, as we come out of earnings season – what will be the stimulus for taking this market higher? Remember the old adage: "Sell in May and go away?" Unfortunately, the only big events I see on the horizon aren't that market friendly – one being a real war with N. Korea. So, this week I’m looking for a bit more fade to the downside before any real attempts are made at setting new all-time highs.
A curious situation is setting up between gold (and silver) and the miners themselves. The above graph compares the price of gold (black line) to a typical mining company (Barrick Gold – ABX). You can see how the yellow line plunges when compared to the black line. Gold is in the early stages of a bull market, and has many fundamental forces lining up to drive it higher. I believe that the gold and silver miners will turn around and catch-up to the increase in price of their underlying metals. Gold is coiling to move higher, with the various bear raids ending in frustration. With U.S. GDP growth crawling along at less than 1 percent, this is a fertile environment for gold, silver, and miners of all sizes.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews. You can learn more and get your free subscription by visiting:
Please write to Mr. Culbertson at: <firstname.lastname@example.org> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <http://rfcfinancialnews.blogspot.com/>.
If you'd like to view RF's actual stock trades - and see more of his thoughts - please feel free to sign up as a Twitter follower - "taylorpamm" is the handle.
If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing:
Creativity = https://youtu.be/n2QiPSe_dKk
Investing = https://youtu.be/zIIlk6DlSOM
Marketing = https://youtu.be/p0wWGdOfYXI
Sales = https://youtu.be/blKw0zb6SZk
To unsubscribe please refer to the bottom of the email.
Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations. Mr. Culbertson and related parties are not registered and licensed brokers. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.
Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.
All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.
Until next week – be safe. Until next week – be safe.