Friday, February 15, 2013

And The Fraud Rolls on 1 Year Later

Hello Friends!

I am not sure who is still following me since I haven't posted in about a year, but I felt compelled to share my thoughts around the markets. 

It's quite amazing to me to see where stocks are 4 years from the lows that were set in 2009.  The amount of corruption/money printing that it took for us to get here is something I never could have expected.  My hope and expectations as I wrote this blog back in 2008/2009 was that we would take our medicine and write down the losses from the housing boom.  This turned out to be a silly mistake considering the astounding amounts of Wall St money that flowed into Washington DC following the crisis.

So where are we now after a 4 year boom in stocks?  That's a great question.  History is always a great barometer of what's to come and it's told us in the past that most bull markets last around 4 years.  I suspect we are nearing the euphoria stage of this current run up in stocks.

However, thanks to the Fed, the game has changed.  Bonds IMO are no longer a "safe haven" anymore thanks to the Fed buying 80% of the longer end of the bond market..  I mean let's get real here:  Does a 2% yield on the 10 year represent real RISK from an inflationary standpoint?  I think not.

So what have here are investors that are desperate for yield done in response to this new dynamic.  They have taken on much greater risk in order to maintain their 5% yields by buying high yield junk bonds and high dividend stocks.  Savers are getting screwed with a capital S thanks to the Fed's 0% interest policy.

I can honestly can say that I don't blame them for chasing yield.  I mean you gotta pay the bills right?.  However, do I think this is a good long term strategy?  Of course not.  IMO the sheep are being led to slaughter.  Risky assets have been bid up to ridiculous prices.  Historically junk bonds do not pay 5%.  These are treasury type yields  .  Investors need to realize that junk bonds are called JUNK for a reason.  They are highly risky and could very well blow up in your face.  I would suggest that high yield investors take a good hard look at their portfolios and perhaps pare down these holdings.

That being said, I have different feelings around strong dividend stocks that have strong balance sheets.  I think the next crisis will be around solvency, and I am curious to see how this dynamic plays out between stocks with strong balance shets and bonds.

The key question for me is this:  Would you prefer to own treasuries that are essentially bankrupt as we continue to run up our deficits or own stocks like Microsoft, Intel , and Cisco and others that have $30-$60 billion in cash on their balance sheets and continue to pay strong dividends..

This IMO is the million dollar question moving forward. 


minton said...

Funnily enough, I checked your blog earlier this week after being gone for a while - glad to see you back!

I too can't believe where we are four years later. There's been no real regulation or changes in the business practices that led to the crash and nobody's even gone to jail. All that's happened is that they've privatized the profits and socialized the risk, leaving Americans with trillions of dollars of debt and no reasonable way to pay it off.

I agree with you - anyone who buys Treasuries over stock is crazy right now. At some point the US govt is going to have to default whereas I suspect Microsoft, Cisco and Apple will be just fine.

Keep blogging Jeff!

Neal said...

I'm still here though I never commented before.

Glenn Beck had Jim Rogers on his show recently and talked about how we're past the point of no return. He asked Jim what a lot of us want to know. What does the average non-rich person need to do to prepare for what's ahead? Rogers waxed on about agriculture...not really actionable intel for my 1/4 acre homestead. What are we to do to protect the US$ we have now? Be doomsday preppers? forex? stocks? metals? I read enough econ blogs to remind myself I'll never really get economics.

Jeff said...

Hi Minton!

Great to hear from you my friend. I know it's been awhile.

I agree. No jailtime for anyone on WAll St. Elizabeth Wrren had a nice rant on this last week.

Investing has gotten so tricky recently. We have the sequester coming up so that should be interesting.

The stock market always changes which is one of the things I love about it. The markets can never be mastered and I get humbled regularly but it only makes me more fascinated by how it all plays out.

Jeff said...


Glad to see your still here!

In terms of answering your question I don't think anyone has the answer.

The only suggestion I can make is to pay off all debts. The Fed is goading all of us into going into more debt with low rates but it's a sucker's bet. Some will say that with zero rates debtors rule and savers get punished.

Personally, I prefer to owe nobody anything.

In terms of a USD hedge? Real estate, diversify into other currencies such as the Canadian dollar, and prepping to a point probably couldn't hurt.

I don't see the world coming to an end like some do when it comes to the economy. My expect to see some type of dollar devaluation which will hurt but there are many other countries that will devalue first so we have some time to prepare.

Japan has the ball rolling here and I suspect if the Yen spirals down then other currencies will react and race towards the bottom so they can still export.

The options aren't pretty and I wish I had better ideas as to what to do.