Wolf Richter with host Chris Waltzek at GoldSeek.com Radio:
The economy and the labor market are strong, powered in part by consumer spending, fueled by a surge in consumer borrowing. But in the subprime sector, default rates are now soaring and lenders are reacting by tightening their lending standards. At the same time, interest rates are rising in the credit-addicted economy, and asset prices, which have skyrocketed in near-unison over the past eight years, are being targeted, also in near-unison, for a haircut (18 min):
The US Gross National Debt spiked $1.2 trillion in 6 Months and just hit $21 Trillion. It now amounts to 106.4% of GDP. These dang trillions fly by so fast, they’re hard to see. And these are the economic boom times. Read… US Gross National Debt Spikes $1.2 Trillion in 6 Months, Hits $21 Trillion
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This is what I thought for the past five years but the boom chugs on as I sit safely (i hope) in tips and cd’s.
There’s still value out there, you just need to look beyond obvious choices like NASDAQ stocks or blue chips in general. I’m making a mint out of Australian lithium plays atm like Tawana Resources (*shameless plug).
Still tricky though looking for value, is there any lithium stocks profitable at cheap values? I was looking at investing in rare earths space as a play if China eventually counters with a trade tensions (since they hold 85%+ of rare earths production) but even that space is very thin.
Wolfstreet is frustrating because one could assume
1) don’t invest in stocks because they’re over-valued.
2) don’t invest in bonds because they’re over-valued.
As Ray Dalios’s all weather type portfolios now dominate the investment mindset (a mix of stocks and bonds), one could assume we’re all doomed, since they relied upon the now decades old bull market in bonds to provide a return.
It would be nice to know where we should invest, rather than telling us where not to invest.
Here is the problem investors are running into: After eight years of asset price inflation, just about all asset classes everywhere are way overvalued, and there is not really any place to hide.
Investors had it so good for so long (eight years). They have been spoiled thinking that whatever they invest in should make money. Now it’s hard to grasp that this is no longer the case. Nearly everything went up together as a result of asset price inflation.
Just like investors made money no matter what they did over the past eight years, going forward they’re going to give up some of those gains, no matter what they do.
Great summary. There are some opportunities in interest rate sensitive securities, if you are correct on the direction.
Does that mean holding cash isn’t a bad idea when everything is overvalued?
Ha, I should have listened to the whole thing before asking. Thanks Wolf for the commentary.
Cash and short-term Treasuries now return about 1.5% to 2%. That’s still not enough to compensate for inflation. A year from now, those returns will likely be in the range of 2.5% to 3% or higher. At some point, a focus on “capital preservation” for some of your holdings can be a good idea.
The American people keep coming back for haircut after haircut. They let half of their industrial base go overseas, let 11 millions illegal come into the country, and let their political basis become a piece of dung (controlled by corporations & big $ political contributions). You can screw the American public at whim and at will.
You have correctly identified the problem investors are facing.
However, I don’t think the answer is cash or waiting, it will only get worse.
What we are witnessing is that there is no free lunch out there and that trillions of fresh money injected in the economy has resulted in elevated prices everywhere.
Our money has been massively devalued and there is nothing we can do about it.
Whoever got assets, was lucky to get some inflation protection, for the rest, welcome to the new normal of theft and slavery through inflation, that will outlast most of us.
That some unelected academics at the FED can print trillions at will to support and purchase assets at will without any scientific evidence to public good or democratic accounting should be a federal crime of the same magnitude as treason.
This is the most demonstrative property theft in broad daylight
I had this thought too. But if you think about FED’s strategy, it is to force you to play the game (speculation/gambling) that you are NOT good at by manipulating the basic accounting unit which is the score of the game. The rule of speculation and gambling has always been 5% win and 95% got wiped out eventually no matter how many chips you have when you are still in it. So my decision is that I will play if I am in the 5% in terms of competitiveness of speculating price movement that is detached from any fundamentals and being manipulated by the house. If I am NOt the 5%, I will stay getting killed by the house slowly and waiting for chance for them to screw up. So here is the strategy “ every 10 years or so, dark cloud will come to financial market and it will rain gold, my job is to be ready for that”. This is Warren Buffet holding 100billion in cash at this moment.
Lots of Boomers, after a lifetime of drinking, smoking, inhaling asbestos dust, etc. are retiring and, well, dying. Maybe “viaticals’ are a good investment. I mean, a guy I know lost a quarter-million on those so … someone made that money off of him.
I think people are overestimating boomers’ eagerness to die. I think I’ve got three decades left in me if I’m lucky, knock on wood. Many boomers feel that way. So people waiting for us to die off in massive numbers might have to learn how to be very patient :-]
LOL, The great death and taxes bull market?
Seems like military contractors won’t see red until the12th of never.
Wolf – at age 55, I’m a Boomer or an X’er depending on who you ask. I consider myself an X’er on the basis that the Boomers had what my 5-years-older sister had: Good schools, enough to eat, clothes, shoes, safety and security. By the time I came along, I was a latch-key kid (the original name for the X’ers) all the way. I had to be very inventive, enterprising, and able to get by with very little. Education was not what the schools were about; they were about keeping you off the street.
That being said, I think there’s quite the Boomer continuum. The early Boomers would have grown up in an era when everyone smoked, “health food” was a cuss word, etc. Younger Boomers like myself, I think, tend to follow a bit healthier lifestyles, avoid smoking, etc.
I’m finding that, on both sides of my family, living into one’s 90s is no problem with a decent lifestyle. I think, though, that both of us benefit from being Californians; there’s just a bit more of a value placed on being healthy out here.
But isn’t overall life expectancy going down in the US these days?
And either silver is too undervalued or gold is overvalued. So buying both silver and gold means you at least won’t lose money.
Then again with so many crisis and bubbles ready to pop the value of gold won’t fall for long in these turbulent times.
NO Precious Metals as an asset class are WAY undervalued
I own some PMs. And I have no interest in selling them. But I doubt they have bottomed out.
Back in the early 1980s, my first big loss was in silver. I’d done all the right things, waited for it to plunge 30%+, bought physical, etc. It continued to plunge. I finally sold at a loss of 50% a couple of years later. It continued to go lower for about another two decades!!
In other words, PM cycles can last a very long time, on the way up, and on the way down. I don’t think we’re through yet. It has just been a few years.
I like silver, I listen to a lot of silver dealers talking about the value of it. The one thing that most of them miss is the medical value. There is lots of talk about antibiotic resistant viruses and bacteria, it is my experience that silver will kill these bugs almost instantly. I think it will make a comeback in the medical world, it is being put in soaps and now one of the bandaid companies are putting it on bandaids. It is excellent for wound healing, and water filtration, all the high dollar water filtration systems have silver embedded in the filters.
I have heard there are cryptocurrencys being backed by silver. I think it is extremely undervalued.
Start a buisness.
I agree that all asset classes are inflated and cash returns are below real inflation. However, if the prices collapse, as before, many businesses will fail when most investment holdings collapse in value and consumers cut expenses to the bone. Any business you start must provide some essential service. That is why a certain billionaire is wise to buy railroads and (since banksters control the government) banks.
Starting a business is an easy way to lose money.
If you put a guy who had a desk job most of their life behind their own business, they will most likely lose it all.
I have seen it every time there was extra money around and people decided to have their own business, most of them ended bad.
Don’t start a business if you have no clue what are you doing.
Don’t start a business in a saturated market, like opening a restaurant in New York.
Accounting is important.
Beware of your expenses.
And if you have so much cash please donate to Wolf Street to keep this site alive.
I agree with your rules. They’re totally essential. Well, unless you have a VC-funded startup and you’re losing other people’s money :-]
I love your last rule!!!!!!!
Raxadian – “Don’t start a business if you don’t have a clue what you’re doing” – this, 1000X
The successful businesses I’ve known or heard about were things like, a guy working for a paint company for a decade or so and knowing painting inside and out, and thus knowing what he’s doing when he goes into selling and servicing paint spraying equipment.
Or a chicken place I used to eat at in Costa Mesa, started by a guy who was the cook at another place for a good long while, first.
Or keep your business instead of thinking about selling.
But I’m also seeing some very funny real estate projects that look like some kind of bond scam. Building in undesirable downtowns with the public support of the local government. Apartment buildings, a hotel, a office building, surrounded with the centerpiece being an A-league baseball stadium all by the same developer. A $100 million project supposedly.
It looks funny enough from most locals where they assume the taxpayer will pick up the bill eventually. But I’m thinking that it could be something like the equivalent of the developer coming in way under cost, pocking the difference, and then being able to walk away with the downtown looking relatively better than before.
Jut to clarify, the city in this scenario is building the baseball stadium with public bonds at a cost of over $30 million.
And the rest is being built by a private developer. Not sure how the developer is funding his project. Maybe a non-recourse loan from a very friendly bank.
The project looks risky because it’s all in a place with a relatively high crime area. With a city (Fayetteville,NC) with an above average crime rate.
And the city (like most cities) does not have a reputation of doing construction projects at or under budget.
Picking the right market is the challenge. Amazon dominates online, brick and mortar is dead, restaurants are starting to slow as people have less “play” money. Auto is slowly transitioning to automation.
Start a Bitcoin mining business? Other have tried, getting crushed.
Start a business selling Tulips????
The truth is, there is NO more “investing”. Investing by definition is to buy asset with forcastable cash flow with estimate of risk and at reasonable price with error margin. For the past 8 years, it is all about P/E increase and NOT about E expansion or sustainability in future cash flows. When you talk about investing, you are actually talking about speculating on what money printers will do to affect the P/E. E will stay the stable or even drop during recession, but P/E can vary a lot depending what money printers do. Advice, if you are NOT their friends, be careful.
Exactly. What many long term “investors” in equities fail to understand is that they have locked themselves in to the most pitiful returns in the future given current P/E ratios.
Yes, over the short to medium term valuations can hardly matter. But over the long term (i.e., a dozen years or more) they absolutely, positively matter. I would even go as far as saying that over those lengths of time they are the ONLY thing that matter because eventually cash-flow catches up to everything. Unfortunately, the insane price appreciation over the past decade seem to have completely blinded a generation of equity investors to this fact.
Seems that Ray Dalio made the wrong call at the 2018 WEF meeting in Davos.
Or did he? Did he sell despite what he said there?
Marc Faber also says: “all asset classes are overvalued”
The only thing I think I disagree with Wolf is his feeling that there won’t be a crash, that the unwind of these grossly inflated assets will be gradual.
The last time I used a cartoon analogy on WS it was borrowed by the CBC’s financial guy Browne so I hereby give him permission to use this one, no attribution needed.
In the Road Runner cartoons it often happens that Wiley Coyote runs off a cliff as he chases RR.
For a second he defies gravity; because he doesn’t know he’s run off a cliff. Then he looks down, reality strikes, and he plunges.
Of course in PHYSICAL reality, belief won’t let you defy gravity. Wiley’s brief levitation is fictional. But why do we instinctively recognize there is something true about it?
There are lots of situations in real life where people can have no idea they are in danger and this belief can actually ward off the danger. At least for a while.
Markets are largely psychological and belief alone can make them defy ‘gravity’ or deflation until the last dollar has been committed.
Then, maybe, comes the look down and the WTF?
“I own shares in a company with a PE of 350?”
“I’m making truck payments of 480 dollars every two weeks?”
“My 600 K mortgage resets in 8 months?’
The last two are more middle- class concerns, but suppose the asset owning class decided to go just 10 percent cash.
Would that even be possible? Or are asset values so in excess of cash that even an attempt to go five percent cash would create a panicked rush for a very small exit?
I’ve noticed that FNMA is now kicking back ~3% ….just the amount that FHA is requiring and thus making it a “nothing down” loan. Credit is booming while cash is scarce.
If the Fed were to introduce negative rates, the Dow might reach 100K, who wants to hold cash at that point? Companies will be paid to buy their own stock.
Happy days are ahead.
The Fed has expressed many times, through various Fed governors, that they will likely maintain the “zero-bound” as the lowest level. In other words, they won’t go lower than they did during the Financial Crisis. They do not want to go into negative rates. They have seen what that does. So don’t count on negative rates. Likely not going to happen.
“Likely not going to happen”
Never say never when central banks and free money are involved. It’s all about how to best manage the people running the Fed and interest rates. We just dodged a bullet and would have, likely, started to mimic the other free money – debt monetization – negative rate economies just about everywhere else. The risk is still there, just in the increasing distance. It’s too soon to declare victory, but victory looks like a likely event.
I don’t count on negative rates as a policy. In fact buying stocks right now is akin to burning money, but the forces are arrayed in this country to do whatever it takes besides forcing “rich” people to declare bankruptcy when SHTF.
But I do think at zero rate and the Dow under 10K, the powers that be will revisit their decision. If the ECB can do it, why not the Fed?
I wonder if the Germans were thinking the same thing before Draghi slithered onto the scene?
Wolf, a third major impact housing has on the economy, in addition to the buying/selling and construction impacts you mentioned, is the stimulus to spending that owning a single-family home has. People tend to stuff more “stuff” in a home versus an apartment, plus all the maintenance, repairs, etc. Also, as interest rates start to perk up, I believed FDIC-insured cash is going to increasingly be an attractive option, especially for more risk-adverse older Americans. The online banks are starting to offer APYs on savings accounts and CDs that are showing some signs of life.
I expect a time when we have negative money velocity, money goes into cash faster than the Fed can print it, which implies an FDIC failure.
Well in that case, to paraphrase Yogi Berra, “It’s deja vu (as in 1929) all over again.” Better hope you had spent some of that cash building a bunker.
Good point about renters not buying the stuff vs. those who own. I’ve been a renter for quite a while and have had plenty of money to purchase stuff for the various houses we’ve rented.
But… I usually don’t. I don’t want to have to move it in a year or two. I don’t want to buy something that “fits” this room when I move it won’t fit in.
I pulled mostly out of US equities in late 2016. Then the Trump bump pushed the Dow up over 25%. I went into CDs (1.5%) and short term AA bonds 2%. My crystal ball is broken.
I spoke with a major financial firm last week curious about getting back in and noticed the conservative portfolio recommended had
1) Minimal US equities. Overpriced in their opinion.
2) No REITs. Highly overvalued in their opinion.
3) More European equities. Less overpriced in their opinion.
4) Minimal short term US bonds. I was puzzled, even though they are short term, still overvalued.
They aren’t going to recommend cash.
If you want a sure thing, I can recommend timeshares on the Salton sea.
I guess the long term retirement investments are a lot different than the invesent concerns of already wealthy investors looking for shorter term stable gains.
The general philosophy for retirement investment seems it should still remain invest in the total global stock market and rebalance more into us and foreign bond indexes as you get older.
There really aren’t any other options for average workers short of building wealth through far more risky and specific investments. Maybe becoming a land lord would be the only more straight forward alternative.
Or is there real concern that the next crash could be so long and drawn out that even global indexes investments get sent into a decades long death spiral. I mean anything could happen. But sitting on the side lines is never recommended, I believe that falls under market timing if you are holding retirement money in a safe place waiting for a crash to dive into the market. You miss out on years of gains that balance some potentially really bad years of loses.
I am doing a hand stand right now and i see many opportunities !!
It’s like Gravity! Ride the Gravy train for the next year or so!
SPY puts for the win. Just wait until the first read of Q1 GDP comes in, EOM April, for everything to come unglued.
Enjoy as all working mainstream narratives explode at once, with a moment of extreme clarity.
Dont forget to dollar-cost-average it, they get cheaper for people willing to wait.
I don’t know how anyone can say the economy is doing better. Wolf, I don’t think you are aware of the ways the government manipulates GDP, unemployment, and job growth. Here is a good place to start…
Mike – the economy hasn’t recovered for the 90%. It’s only the top 10%, Boomers who inherited money and thus got paid money for having money, for whom the economy’s been good. For the rest of us it’s like 2009 still.
Agreed. The Fed is propping things up by propping up the bond market. I don’t know how Wolf can say that the economy is good.
Ok, how about this for an investment idea when all other asset classes are sinking: a med-term Treasury bond fund. The rationale is as follows:
1) the US government will not default so no default risk.
2) the fund’s interest rate risk is tempered by the manager holding most of the bonds to maturity. As bonds mature they are then reinvested into new medium-term bonds that are now being issued at higher rates. Medium-term durations will reduce term risk vs. a long-term bond fund while receiving a higher rate over a short-term fund.
This approach will have volatility, especially if rates jump sharply. However over time it should recover and work when equities are under-performing and money market funds only offer lower returns.
If that’s your plan, why not buy and hold the bonds outright until they mature? You can buy them directly from the government and cut out all the middlemen, commissions, fees, and other problems associated with bond funds.
This sounds like my kind of investment, but I think I need a bigger bank account to get to that table.
I don’t think the minimum capital requirements are huge. This is for individuals…
But what about massive deficit spending and the fact rates are still pretty low on a historical basis + the fact that Americans are still spending? I think stocks will keep going up for a few more years…IMHO…
if i had the money, i’d pile into 2 years.
and then take a nap.
I’m not comprehending how this situation could be interpreted as inflationary. thus LABD looks better than TIP ETF (for example)
Thanks for the astute advice and the URL. However, in my situation the bulk of my ‘liquid’ assets are ‘trapped’ in a 403b retirement account so to buy Treasuries directly I would generate an outsized taxable event. I can, however, transfer within the account to two bond funds. One fund only has 14% Treasuries (fourth largest holding) with the top three bond holdings are 25% corporate, 19% MBS and 14% foreign gov. and corporate bonds. The other fund is 98% US TIPS with 87% of the maturities between one to ten years and 12% beyond ten years. Is the TIPS fund the tallest dwarf in the room? Thanks!
I warn people about “open-end” bond mutual funds, especially during periods when credit gets tighter. They can experience “runs,” with the “early-mover advantage,” and when the fund runs out of liquid bonds (Treasuries) to liquidate, it collapses and takes most of the money of its remaining holders with it.
I do NOT like open-end bond funds. They look safe but can be dangerous. I’d much rather own the bonds outright.
Quite a few of these funds collapsed during the Financial Crisis. As an example, Google: schwab yieldplus class action lawsuit