Negative rates and collapse fears; two prerequisites to enable the largest transfer of wealth in human history

Think about it; If the world goes to war, where will the U.S. get its oil and agricultural goods?
We are being played as the suckers during the largest transfer of wealth going back to Adam

We need to start contemplating the economic ramifications of a global conflict scenario, because the Anglo-American elites and their companies are already way ahead of us.

Where do you think the United States will procure its energy in a post-WW III world? They will get it right here at home, and when their firms, with their zero-cost borrowings, are done buying up all the choicest fracking acreage, they will soak us forever. The best part is that fracking offers some of the best energy opportunities in a post economically-collapsed environment, since the start-up costs are a small fraction of traditional methods. But according to the alt-financial media, fracking is a myth, built on cheap rates.

What’s the game here? Beat down and bankrupt oil and gas assets, beat down and bankrupt agricultural assets, [then] sweep in and buy them all up with the zero cost borrowing?

That’s what you are saying, no?

I almost wonder if the Green New Deal isn’t part of the ruse to take the eye off oil and gas.

Incredible if true.

Have a good weekend.

Alex -Illinois

If Exxon, Chevron, and BP are buying up shale oil assets hand over fist while the underlying asset prices plummet, I think it’s safe to say that shale oil has an excellent future, especially in a post economically-collapsed environment or post-war world. These blue chip, globalist firms know much more about the industry than ZeroHedge and the Economic Collapse Blog. Large drilling projects with multi-billion dollar start-up costs would no longer be practical under such scenarios.

Think about this; Wouldn’t it be in the best interest of the elites to watch asset prices collapse? Wouldn’t it be in their best interests to denigrate the shale oil concept to suppress asset values? I say it would.

I also find that concepts like the “green new deal” make it more difficult for the typical farmer and oil driller to stay in business. Government regulation of all kinds, while ostensibly promulgated as a public good, only work to crowd out investment. Only the biggest and most well-funded firms can stay in business and keep up on the regulations. It’s as if the government acts like an organized crime enforcer, so only those able to play along can remain in business. The government benefits, but so do the large multinationals who are stripped of extra competition. Very often, the foundations that promote ideas like the green new deal are funded by the multinational firms who we think would be against the regulations.

What’s worse, is that the more regulations that are heaped onto the backs of farmers and oil drillers, the lower their assets prices move over time. More and more suppliers drop out of the game – all in the name of a protecting the environment.

More trouble for Indiana farmers: their land isn’t worth as much.

The annual Purdue Land Value Survey finds the best farmland selling for $456 an acre less than it did last year. That’s a 5% decline, and a 16% drop since values peaked five years ago. The current average is the lowest since 2012.

Farmland Values for Best Land Sink to Lowest Level in Seven Years; WIBC.com – Indianapolis, IN, August 26th

How about the so-called “greedy bankers” who turn the American and Canadian farmers into debt slaves. The American and Canadian farmers mortgage their lands and use high-cost debt to grow crops that can be grown for less in South America.

I think of all that farm land in the plains states, whose owners can no longer service their lands and debts within the constraints of the globalized commodity markets. I can picture a scenario where land prices collapse and the multinational food manufacturers swoop in and use their zero-money to buy up assets for pennies on the dollar.

That’s right, we are being played on a scale that is unimaginable. The elites are guiding interest rates and the yield curve lower, so they can drop their borrowing costs, which will facilitate their efforts in buying up the world’s best assets. It has nothing to do with raising prices and economic growth. Lower rates actually inhibit loan formation and help to suppress economic vitality.

Lower rates only work to consolidate corporate and government power over the populace, since these entities are the only ones who are able to borrow at these rates for general borrowing purposes. You and I may be able to get a cheap mortgage, but that is an asset-backed loan whose underlying collateral will not generate offsetting income. Only the best and biggest will be able to exploit these debt markets to buy up the world, while the rest of us have our assets slowly stripped away from high holding costs.

Martin Armstrong is out there talking up his big bang theory again and that it took place as he said it would. Talk about bias and backfire effect. He was all wrong, but that doesn’t matter to the thousands of his followers who can never be convinced that they were gamed as suckers. If it wasn’t collapse from high interest rates then it’s a collapse from low rates.

Armstrong mentions in his post that the politicians are leaning on the central bankers to buy up all the debt and keep rates low. But, if it were up to his cycles, nothing the central banks and politicians could do would be able to save the system he says has been collapsing since 2015. Furthermore, his cycles mention a bottom in 2020. But if we didn’t have a top going into 2015, how can we have a bottom going into next year? So many questions, so few answers. Armstrong is just covering his tracks. I find it highly likely that this system will drag on for years and rates will continue to go firmly negative.

This whole scheme of negative rates is one that is only benefiting the elites of the new world order and their controlled firms. The worse the economy performs the better their financial system performs for them.

Another oil major, British Petroleum, sells billions of existing oil assets to double down on shale

Despite cries to the contrary, big oil sees tremendous value in shale oil assets
  • Shareholders are tired of multi-billion dollar project start up costs and the large oil firms are encouraged with the relatively cheap extraction costs in the lower 48 states.
  • Large majors with cheap costs of capital (2-3% or less) will take over the entire sector.
  • Large oil firms are dumping existing assets to concentrate on lower 48 shale.
  • XOP components with high costs of capital (6-10% or more) are priced as if default is inevitable.
  • Most independent’s assets will be sold off in distressed sales or bankruptcy auctions.
  • Large oil firms can make money in shale with $40 oil. As the supplier pool consolidates, pricing power will return.
  • We have been predicting that as interest rates fall loan growth will fall and access to cheap credit will actually be more difficult. Only the biggest and the best will be able to exploit the markets with their borrowing power.

BP announced the sale of its Alaska operations to Hilcorp Energy Co. for $5.6 billion. The sale includes BP’s stake in the Prudhoe Bay oil field, the largest oil field in North America that once produced 1.5 million barrels per day at its peak in the late 1980s. Hilcorp will also acquire BP’s stake in the Trans-Alaskan Pipeline.

For BP, priorities are shifting elsewhere. Notably, it bought up U.S. shale assets from BHP Billiton last year for $10 billion, and the British company has also vowed to divest $10 billion worth of assets between 2019 and 2020. In that context, BP’s sale of Alaska can be viewed as a pivot from mature conventional drilling operations to U.S. shale. “We see this move as part of a strategic shift by BP to focus further on US tight oil assets, having acquired a large portfolio from BHP last year,” Espen Erlingsen, Rystad Energy’s head of upstream research, said in a statement.

As Liam Denning notes in Bloomberg Opinion, BP’s sale is a sign of the times. Oil majors have been “retreating from traditional strongholds” in the last few years, pressured by shareholders to cut spending and steer clear of budget-busting megaprojects. Just about all of the majors have exited from Canada’s oil sands and many of them have been pulling out of the North Sea, for instance.

BP Exits Alaska To Double Down On Shale – OilPrice.com, August 28th

Add BP to the growing list of oil majors that see plenty of opportunity in U.S. shale oil

If we pay attention to the tired old conventional wisdom that shale oil is a scam and only a result of low interest rates, we will be distracted from the huge transformation taking place in the shale oil regions of the United States. It is easy to focus on the ongoing carnage in the shale oil explorers, prospectors, and service firms (XOP and OIH) and conclude that shale oil is a passing fad, but the large oil producers have been unloading billions of dollars in existing legacy oil assets to concentrate on cheaper domestic shale oil. As we had predicted a long time ago, as interest rates fall further, only the large multinational oil plays, like XOM and CVX, will be left standing with their ultra-cheap costs of capital. Now, we can add BP to the mix as well.

XOM’s 16/26 bond is currently yielding 2.02%. As yields fall, prices are going up. Moody’s rates XOM’s new notes Aaa. XOM’s net income for 2018 was $20.8 billion

Exxon Mobil’s Corporate debt, maturing in March 2026 is currently yielding 2.02% and their net income for last year was almost $21 billion. CVX’s net income for 2018 was $14.8 bil. Even the largest independent P&E’s like EOG and PXD cannot hold a candle to XOM, CVX, and BP.

Even though WTI crude has stabilized in the mid-50s, the XOP components of frackers and producers are still tanking. Their costs of capital are just too high, they lack economies of scale and vertical integration, and suffer from bloated and inefficient management.

The independent P&E’s with junk bond ratings can never compete head-to-head with the largest oil producers oil. Firms with 8% borrowing costs cannot stay in business when their largest competitors can borrow at 2.0%.

In the new world order, low interest rates will not result in higher economic and loan growth. Sinking yields will only work to consolidate oligopolistic corporate and government control. These large firms can push the supply curve down and out and produce at lower prices, while the smaller firms lose out.

A gold investor of several years contemplates taking profit; Should he?

I think something strange is going on with gold…

As a gold investor of several years I might be feeling good about the recent strength of the metal. I am instead asking more and more often if I should sell. I do believe we are entering a new era of need for crisis containment and it feels good to know you have it.

The old problem with gold remains that it is insurance that will retreat in value as soon as crisis retreats. You can sell after a run and pay taxes and then what. There is no income and apparently no future in holding hard money. A few rental units in the rural area where I live are looking more and more attractive.

Regards,
Dave

Dave presents many legitimate observations and asks some timely questions about gold and the world in general.

…What’s different with gold this time
Gold in euros is at all time highs
Gold in GBP is at all-time highs
Gold in yen is at all-time highs

As we can see, gold keeps rising, and in many major currencies, including the Australian and Canadian dollars, it keeps putting in newer all-time highs. Gold prices have eclipsed long ago their former highs in the major currencies of the developing nations like the peso, rupee, ruble, and real. There is a trend in place right now, which reminds of how gold performed in the middle of last decade as it crossed the $500 mark in the second half of 2005.

Gold should comprise a small percentage (10-15%) of our asset portfolio and we need to appreciate why we hold it. This understanding is important, because if we own it for the wrong reasons (e.g. inflation hedge, currency converting to gold-backing, market collapse, China acquiring gold in size, etc.) we will be disappointed and become disillusioned when it doesn’t perform as we were told. Moreover, we run the risk of misallocating our personal investment capital if we devote working funds to physical gold and expect imminent capital gains.

Why we should own gold and the disingenuous gold promoting and dollar bashing – Know Your Adversary, May 2018

I do not view gold as an insurance policy per se, especially with how most gold bugs view it. As we have explained in the past, in many respects, we see that current monetary policy is actually disinflationary or potentially outright deflationary. The massive addition of debt to the global balance sheet is providing massive deflationary forces that actually should be gold bearish.

Instead, in the face of fading commodity prices, we see gold as the outlier. I find its rise peculiar and persistent. I am a long gold holder, as I have been since 2005, and will continue to hold. I own gold eagles that sell close to spot, as I am only concerned with the movement in the price of gold.

But, gold is telling us something that we should be concerned about. I think it is telegraphing us that there may be an upcoming potential economic catastrophe in the making. Notice how gold began to rise out of its channel in 2005, a full three years before the problems that led to the market collapses in 2008 occurred. I am concerned that we are being warned of another pending financial and economic unwind over the next few years.

As a result, I still recommend gold as an asset. It should not be more than 10-15% of someone’s net worth, but that is just as a passive position. We can certainly trade gold as well, and despite the latest ultra-bearish COT report, I still see price pressure to the upside. The global puppets are doing their best to bring forth the next phase of the new world order. God help us.

If prices on commodities and other assets are falling, it still makes sense to hold cash

The subscriber observes that holding hard cash may be misguided, but I disagree with this somewhat. We see how commodity prices are failing to keep up and how savings rates keep falling. Moreover, the orderly addition of sovereign debt to the collective balance sheet is creating the potential for massive deflationary forces going forward. So, cash could be a viable addition to any portfolio in the face of growing uncertainty.

Of course, I am always a fan of owning rental properties (as long as the numbers make sense and one is not overly exposed to the potential of falling housing prices with over-leveraged holdings.) If one can acquire a property with a mid-single cap rate, that income will come in every year, and will rise as rents climb and mortgage principal is paid down. Moreover, borrowing rates keep falling. Thus, the monthly debt payments have come down for investors more than for owner-occupied loans. Hard money lenders that once loaned out for 8% are lending for 5-6%. There is a lot to be said for receiving consistent monthly income, especially as we get older.

Conclusion

As with any asset, it is important that we scale out of a position as prices rise and scale in as prices fall. I know this sound basic and straightforward, but most novice traders and investors, by definition, do the exact opposite. If you are concerned that gold prices are going to fall – and they could move back down violently as the gold COT report unwinds – then sell a small part of your gold position and lock in profit. I sold 10% of my gold bullion at $850 last decade and thought I was a champ. It continued to move up higher, but I was more comfortable riding with the remainder as gold prices moved violently higher up into 2011-2012.

Answer to an email; Why was this decade’s real estate debacle a great time to buy rental properties?

Tax code changes encourage home price speculation
Earlier this decade provided us with a once-in-a-generation time to buy rental properties. Capital gains exclusions of up to $500k on owner-occupied properties since 1998 encourages price speculation, but rents grow consistently every year regardless of economic conditions.

A background of the Taxpayer Relief Act of 1997

The Taxpayer Relief Act of 1997 [TRA] also permanently exempted from taxation capital gains on the sale of a personal residence amounting up to $500,000 for married couples filing jointly, and $250,000 for single individuals. This exemption only applies to residences taxpayers have occupied for at least two of the last five years. Taxpayers can only claim this exemption once every two years.

Before the TRA was phased in for 1998, you had to take the profit from your home sale and use it to buy another, more expensive house, within a period of two years. If you didn’t do this, taxation on your profits was inevitable.

The only other option you had to protect your earnings was based on age. If you were 55 or older, you could take a one-time individual exemption of up to $125,000.

In the wake of the TRA, I think you can see how home owners could be encouraged to speculate and sell for the highest prices possible.

Despite fears to the contrary, rents usually continue rising during recessions
  • Rents continue to rise during recessions
  • Home prices will often fall
  • Capitalization rates and internal rates of return rise during recessions
  • Recessions often provide the best times to acquire rental properties

During the last U.S housing crisis in 2008, did the price of rent go down with the house prices, or stay the same.

Thanks.

V – Canada

I think the above chart speaks for itself. I knew real estate investors were handed an auspicious opportunity to accumulate rental properties earlier this decade, because I observed that my rent rolls continued moving higher. Yet, at the same time, prices on certain real estate assets (e.g. condos) dropped by as much as 65-70% and some single-family properties in distressed areas dropped by as much as 40%. In 2005, a condo cap rate was about 6%, but by 2014, the cap rates were approaching 16 – 18%.

Yes, you read those numbers correctly. Armed with this information, I think spotting opportunities in real estate investing becomes self-evident. I loaded up and told everyone who would listen to do the same.

 

August 25th Update – Synthetic solutions to synthetic problems; I try to respond to a lot of emails

 

To download the podcast – Right mouse click here

-Many people ask me about recession and collapse. I see this continuing for years; all the way to eventual war. This past week and this weekend at the G7 summit, for the first time, President Trump crossed the line. His trade rhetoric reached a new level and is now irreversible. His calling Fed Chair an enemy of the state worse than Xi is too much for retraction.
-More thoughts on what the new world order currency will be when things finish spinning out of control.
-Why Donald Trump makes the perfect politician for the next phase of the new world order. The elites need to throw the concept of the nation-state into the trash heap of history, and Trump was the unknown quantity put into place to make that a reality.
-Trump would never have become president if he had been an elected politician previously. His true colors and personal instability would have manifested. No other politician would ever shamelessly embarrass himself like Trump can.
David Ricardo and the concept of comparative advantage.
-Adam Smith and the Wealth of Nations.
-In theory, the international trade models have plenty of merit and I am not here to disagree with them. There are certainly limitations to them, especially if a nation’s objectives rise above just efficient consumption frontiers. It is vital that a nation maintain some sort of productive capacity.
-The engineers of the new world order have hijacked and exploited modern economy theory to suit their secret objectives.
-Economists refer to free trade as an excuse for the large multinational firms to exploit price differences between nations for shareholder profit. All nations are being leveled out, via the modern lie of free trade, into second world nations, including the United States.
-Tell me how free trade models help the United States when the U.S. runs monthly trade deficits of $50 billion.
-Gold analysis. My thoughts about the longer term.

I agree with Bank of England chief; A Libra-like currency makes the most sense in a multi-polar world

Ideas for a new global currency emerge as the elites engineer global economic disaster…
  • Led by Trump and Xi, the world is racing toward a manufactured economic disaster, and this multi-scene act is still unfolding
  • BOE governor, Mark Carney, says global economic order needs dramatic revamp and sees benefits to markets, economies from a multipolar system
  • Carney says that a Libra-like virtual currency would suit a multipolar world
  • The Libra would be backed by a basket a national currencies via sovereign debt holdings
  • Current world order hierarchy would remain intact under such a scenario
  • With the U.S. threatening to close its borders with trade, the dollar can no longer serve as the reserve currency (Triffin paradox)
  • U.S. Fed, with its willfully ignorant and relatively tight policy, is effectively refusing to supply the needed dollars around the world when the countries need them the most.
Given the restricted dialectic process, the Libra will emerge as the logical choice in a multi-polar world as the answer to dollar hegemony

Mark Carney laid out a radical proposal for an overhaul of the global financial system that would eventually replace the dollar as a reserve currency with a Libra-like virtual one.

Just a few months before he steps down as Bank of England governor, Carney offered his vision for the international economy at a time of sweeping change. Trade wars and the threat of currency wars are hurting growth and upending multilateral cooperation, while central banks are trapped in a low interest-rate world as they struggle to revive inflation.

“The combination of heightened economic policy uncertainty, outright protectionism and concerns that further, negative shocks could not be adequately offset because of limited policy space is exacerbating the disinflationary bias in the global economy,” Carney said. “What then must be done?”

Speaking to fellow policy makers and academics at the U.S. Federal Reserve’s annual symposium in Jackson Hole, Wyoming, he said that in the short term central bankers must deal with the situation as it is. But he also warned that “blithe acceptance of the status quo is misguided,” and dramatic steps will ultimately be needed.

His most striking point was that the dollar’s position as the world’s reserve currency must end, and that some form of global digital currency — similar to Facebook Inc’s proposed Libra — would be a better option. That would be preferable to allowing the dollar’s reserve status to be replaced by another national currency such as China’s renminbi.

Carney Urges Libra-Like Reserve Currency to End Dollar Dominance – Bloomberg, August 23rd

As the world hurtles towards economic disaster, potential answers for a new global currency are slowly emerging, and Facebook’s Libra offers the most promise. Though Facebook’s public perception is poor at the moment, three billion people actively use its set of apps, so the Libra has the potential to be the dialectic answer for the global currency. The concept and strategy behind the Libra is a very sound one and the only hindrance holding its usage back is public perception. I submit that over time, this will change and the public will accept it.

We have discussed in the past that the other alternatives will never cut it. We must keep in mind that the global financial and economic system is a well-managed one, and that any suggestion for a dollar replacement that could undermine the existing global hierarchy will never be accepted as a choice. In the next stage of the new world order, other national currencies like the yuan will not provide the solution. Bitcoin and gold will never be used either. I say this, because these alternatives have too many limitations, given the dialectic process unfolding.

The IMF’s Special Drawing Right (SDR) can never work in its present form as the claims on the SDR do not rest with the IMF, but with the countries that print the currencies that back the SDR. This stands in contrast with the Libra; the claim on the Libra rests with the Libra.

At the end of the day, the Facebook Libra may not actually be the replacement to the dollar and the national currencies, But an identical type of coin will be. It has to be and it is the only answer.

Falling bond yields; What will happen to government salaries and pensions?

Total government employee headcount generally has been rising over time. Governments on all levels are getting bigger, but many of the new jobs have been shifted to private contractors, which offer less pay and benefits. The line above would be much higher otherwise.
Total federal government employment may have stabilized over the past couple decades (every 10 years the census workers skew the data), but government is obviously getting bigger.

Chris,
Regarding your latest podcast on falling US govt yields. What [will be the] affect on government salaries and pensions?

David

Long-time government workers receive much better pay and retirement packages than new hires
According to the Office of Personnel Management, 45% of all federal workers are over 50. Federal jobs still offer competitive pay, stability, and decent benefits, but employees hired long ago receive much better benefits than those more recently hired. Age-related bias is also less common on the government level.

The changes (degradation) to the pay and retirement packages in the government sector are gradual and subtle, and many of these adjustments to the total pay packages and benefits are more like small cuts that add up over the years. I also observe that many jobs have been shifting to private contractors. These employers offer lower wages and benefits and over time I find this a viable path for all levels of government. Government services of all kinds will be shifted to the private sector.

I know many federal workers across a number of departments and they tend to be long-term employees.  As crazy as this may sound to some people, I have friends who are federal employees in their 50s and 60s and earn about $150,000 a year. I have tenants who work for the federal government and earn between $80,000 and $150,000 a year.

I know a federal worker in his early 60’s who has been with the Feds for over 30 years. He missed out on the defined benefit plans the Feds used to offer its employees, but his defined contribution package is much more superior than the one offered to later hires. He has almost $2 million in his job-related retirement accounts. Not bad. Good luck to the new hires.

I include the chart with the breakdown of federal employment by age as it shows the older age of the average federal employee. When a person is hired by the federal government they receive a certain pay package with benefits, and these terms are generally in effect for as long as the person stays at the job or with the government. Thus, workers tend to stick around until they can no longer work, because as the years go on, the older employment contract terms are so much more superior to the terms for more recent hires. Since there is no set retirement age in most instances, federal employees are older, on average, than the general workforce. The people who are being hired now have inferior pay and benefit packages.

Since the early 80s, defined benefit plans were purposely phased out in favor of defined contribution plans

The phase out of defined benefit and pension plans began in earnest in the early 1980s, as the elites knew where the world was heading. TPTB needed to gradually lower interest rates over time to move their new world order agenda forward, and this long-term process of ever-lower interest rates continues today. In a world of low interest rates, it’s impossible to fund pension plans that are based on actuarial assumptions. Most private pension plans were established decades ago and most of the annuitants have already left the planet.

In 1981, the concepts of the 401(k) and defined contribution plan were formally established under IRC and were quickly embraced by the private and public sector on the federal level. These plans essentially transferred the risk to the employee from the employer and wiped away most potential future post-job termination employer obligations.

Many local government pension plans are at great risk of default

The rule of thumb here in the United States is this; the federal government offers superior salaries, while the state and local governments offer less pay, but extend decent pension benefits to fully vested employees. These pension plans are contractual in nature and are usually presented as a senior creditor in any type of default. But if the tax jurisdiction doesn’t have the ability to pay, there needs to be some sort of settlement. This often results in discounted benefits. We have heard of a number of cases where pension benefits were cut in lieu of government default, but they are still rare.

The typical local and state jurisdictions conceive their pension plans according to actuarial assumptions, but many effectively end up just being a pay-as-you-go system, as many around the country remain woefully underfunded. Many regulators turn a blind eye to this problem, because the tax jurisdiction could just stick the deficits to the tax payer. It happens often. If any private concern’s pension plan were as underfunded as what some on the local level are currently, they would run into serious problems under ERISA and PBGC rules

Well-funded tax jurisdictions like Fairfax County, VA will be able to fund future pension obligation, regardless of interest rates. The County could easily increase property, sales, and income taxes.

Poorly funded tax jurisdictions like what we see in Illinois or New Jersey will continue to feel the pressure from declining interest rates. I predict that many of these poorly funded state and local plans will have to be renegiotaited. I see no way around it.

The planners in most of the local tax jurisdictions around the country knew that lower rates were coming and have been greatly cutting back pension benefits to newer hires. It is essentially a race against time. State and local government plan sponsors hope to continue shifting future pension obligations to the employee via defined contribution plans.

I have a close friend with advanced degrees who has worked for the county for 24 years. She tells me she needs to work for 30 years to receive full pension benefits, but counts herself lucky. She will receive almost her full salary as her pension. She tells me the more recent hires receive a much more stripped down retirement package. Over time, the county hopes to continually extract itself from the shackles of pension obligations. But, like I said, it’s a race against time for many poorer counties and cities. The areas that can’t raise taxes much higher will have less options.

If a worker is employed by a poorly funded and managed jurisdiction, I would be very concerned. I wonder how states like New Jersey, California, and Illinois will be able to continue funding their plans. These public pension plans are essentially pay-as-you-go schemes, but that strategy can only sustain itself if the jurisdiction can raise taxes as needed. For many of these corrupt states, the limit is near. I would be very concerned if I lived in some of these areas.

So, to answer the original question of what will falling bond yields do to government salaries and pensions under a regime of low rates, I think the answer is somewhat straightforward. Salaries may hold up, but the back-end loaded pay like pensions will continue to get squeezed.

The elites and their corporations consolidate their power and wealth with negative rates

Global corporate power will consolidate with negative rates
As yields fall, it will be increasingly tougher for borrowers to get the best rates. Only the best and largest firms will benefit as their costs of capital will be superior to everyone else’s

I wanted to pass along this thought to my readers. As bond yields continue to fall it will become increasingly difficult to capitalize on a relative basis. Here in the United States, we may think borrowing at 3.6% for a mortgage sounds like a great deal, but in Europe, the largest and best firms are already borrowing at negative rates.

Now, many will say, so what? The EU nation-states already have a ton of negative-yielding debt. But under a regime of negative rates, only the biggest entities (e.g. nations and blue chip corporations) will truly come out ahead. The average person and smaller corporation will always be at a comparative disadvantage and as bond yields fall, the biggest credits will come out on top.

What does this mean? With access to ultra cheap capital, over time, the nation-state governments will naturally exert more control over its people. Moreover, the largest corporations with their low costs of capital will continue to consolidate their power and control over their markets and sectors.

Contemplate a world where the largest corporations can borrow at zero or negative rates. While the nation-states are inefficient spenders and usually have little to show for their borrowings, private investment must make efficient use of their capital. If firms like Nestle can borrow at rates much lower than its competitors, it would be natural to assume that Nestle will oversupply the market and gain market share. Nestle can lower prices and still make money. The list of large firms that borrow at sub-zero rates will continue to grow. Only the leaders in each market sector will benefit on a relative basis.

Control of domestic oil and agriculture will move into tighter hands

If we think we will see calamity in the domestic oil patch, think again. Picture a scenario where firms like Exxon and Chevron can borrow at near-zero rates. They will naturally gain effective control over domestic shale oil production and profit with $40 oil. The other poorly managed and smaller firms will bite the dust. Only the biggest and most powerful will benefit from lower rates. The poorer credits will be left standing as the wealthiest gain more control over the world.

The largest food corporations will eventually take their ultra cheap capital and buy up all the farm land that is currently owned by the over stretched farmers. This will drive commodity prices even lower over time, so these firms can control their input costs. Domestic farmers can no longer compete in a globally-sourced agriculture market and their borrowing costs will remain much higher.

Welcome to the new world order.

A subscriber asks if China is dumping Treasuries; Is it catastrophic?

Is China selling off their Treasury holdings?

Chris,
I read an article yesterday that China is selling a lot of their US Treasury bill holdings.

Who is buying them – Japan? The article stated this is “catastrophic” for the USA. How would China’s sale of US Treasury bills be catastrophic if someone else is buying them?

Thanks,
Gary (Canada)

First, let’s take a look at the Treasury International Capital (TIC) data that is provided by the U.S. Treasury and Federal Reserve System. This data was updated on August 15th. I have provided a pdf file below for your reference.

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES

 

Source: Treasury.gov monthly TIC data to 5/2019

From the TIC data contained in the table, we can see that China has sold off a small fraction of their Treasury holdings over the past 12 months.  Based on the longer-term chart, China has been gradually selling off its treasury holdings since at least 2013.

Would it matter anymore if China dumps its Treasuries?

As we can see, the impact of China’s purchase/sale decisions on the U.S. treasury market has already diminished over time, making the argument almost academic. China’s holdings as a percentage of the total is now down to about 5% from almost 10% at the height.

What would happen if China sold its Treasury holdings?

  1. It would deplete China’s own financial resources, dent confidence in the country as a responsible actor and spook global markets. China still needs the dollar for international transactions.
  2. Such a sale would be aimed at hurting the value of US Treasuries, thereby causing yields to spike. That would be a big deal because the 10-year Treasury rate serves as the benchmark for other forms of global credit, since the dollar is still the reserve currency. Global yields could rise.
  3. Selling would cause its own existing holdings to lose value.
  4. China has limited alternatives for what to do with all its excess cash. Redeploying the money into Japanese and German debt isn’t ideal. Both nations’ 10-year bonds are yielding negative right now, compared with the  1.5% yield for the 10-year US Treasury.
  5. Dumping treasuries would place downward pressure on the dollar and upward pressure on the yuan. Holding onto the cash in yuan would risk allowing China’s own currency to strengthen too much, which tends to be deflationary. It would hurt their own credit markets in the process.
  6. China has had to unload treasuries over time, as this has assisted China in supporting the yuan against the dollar in the marketplace. Despite talk to the contrary, China needs the yuan to keep a stable value, and the selling of its treasury holdings would work to firm up the value of the yuan. If China continued to increase its holdings, the downward pressure on the yuan would have been even greater. I would have to conclude that China’s treasury sales since 2013 have more to do with supporting the yuan and less to do with souring bilateral relations.
  7. China dumping Treasuries would risk destabilizing global financial markets at a time when they’re already jittery. Financial turmoil could spill over into the real economy, worsening the ongoing growth slowdown in China’s trading partners.

At the end of the day, regardless of what China does, the fears of China’s potential impact on the treasury market is probably overblown. Since global bond yields have fallen so far, if China sold now, the impact would be a lot less than if they sold last year. U.S. debt is viewed as among the safest assets on the planet and there’s ample demand from other foreign buyers, large life insurance companies, pension funds, and big banks. The current attractive yields offered on treasuries in relation to other developed nations would make them a sought out purchase. Any pop in yields would prove to be temporary.

One last point about this; The U.S. Fed could easily purchase any of the added supply caused by a large sale from China. We may actually see that sooner rather than later.

A subscriber asks; Should we wait for a recession to buy assets?

Unprecedented and historic circumstances are supporting asset prices

Other than bonds is it possibly too early for other assets? If we are to have a recession the stock market will be down significantly on the hype. The recession itself doesn’t have to be real, just well promoted.

Regards,
D

Here was my response (edited for grammar):

The alt-financial media always say this, while the mainstream press has started its central bank cover campaign.

Hi D,
Just imagine how the US Fed will act if it sees an imminent recession. I certainly do not see one here in the United States, but most of the other developed nations are experiencing massive slowdowns in economic growth. The United States stands out as an outlier, hence its monetary policy is relatively tight.

What I try to tell the listener and reader is that if the US Fed sees an imminent recession, it will slash rates very quickly. Perhaps as quickly as they did last decade. The US fed does not want to risk some sort of calamity like last decade, because it will fully get the blame. The Fed is under the microscope and will err on the side of liberal monetary policy.

I am not here to say that the stock market won’t crater ever again, but we are confronted with the reality of institutionalized ever-declining interest rates. It’s very difficult to contemplate the lowering of asset values when global monetary policy has been geared to be so accommodative, and is bound to be even more so over the next few years.

Since the central banks have taken it upon themselves, in a well-publicized manner, to perpetuate the economic growth timeline and asset cycle, they will do whatever it takes to make things move forward. It is imperative that asset values continue to climb as higher asset values accommodate higher debt loads. The debt loads also accommodate higher asset values. The central banks are more than willing to let sovereign-debt generation pile-up. This alone will force asset prices higher over time as the currencies are debased and the sovereign debt provides more leverageable collateral.

The average person on the street [alt-financial follower] will get poorer over time because he or she is left with the debt burden fallout with no offsetting assets that benefit from rising debt levels and lower interest rates. He is left with the fallout from rising asset values and not partaking in them.

The bearishness on the street is amazing. I am also beginning to grow concerned about the overwhelming bullishness on gold. Everyone is bullish on gold and the business press see it as a no-brainer ticket to gains. The gold commitment of traders is once again historically stretched, and gold has been the only commodity rising in price. I am concerned we could have a redux in gold similar to what happened early in the decade when the first rounds of quantitative easing did not result in calamity.

[With respect to bonds, despite the ‘analysis’ to the contrary, I see an orderly and well-undertstood process taking place in the bond market with no impending calamity, and as interest rates go lower it’s very difficult to contemplate a scenario of collapsing asset values. With this said, I could see a retracement in yields over the short-term].

Once the shock of negative bond yields wear off and people get used to them, they are going to be confronted over the longer-term with the overwhelming and punishing deflationary forces that will result, and many people will be on the wrong side once again when it comes to investing. The followers of the alt-media will once again lose out.

The fear of recession has already acted to provide support to asset prices. The contemplation of this manufactured pending doom has given the central banks the cover to slash bond yields across the board. That alone has provided supportive effects to stocks and real estate. Think about this. The end of the world is being priced in as we speak and stock prices are only down about 4% from their all-time highs. What’s going to happen when things turn around? I would not be shorting the stock market.

Regards,
Chris

I observe the psychological dynamic between Fed Chair, Jerome Powell, and President Trump and can hypothesize. Although President Trump seems to be excoriating Powell’s ostensible hawkish policy, I have to believe that this is just Trump’s disingenuous personality manifesting. Trump knows his traits and picked Powell so he could publicly lambaste him. Trump can only get away with these tactics when the Fed Chair is a white male Christian. This is why I believe Trump picked Powell. Any other Fed Chair who was a member of the tribe would probably be undertaking a similar monetary policy. But by having a goy at the helm, Trump can get away with what he does.

Stop staring at the stock market, there are always opportunities
Sevierville, TN is a beautiful place

Sevierville, Tenn., located in the heart of the Smoky Mountains, ranked as the No. 1 market to buy a vacation home. The cap rate for properties in Sevierville was 10.3%, while the median sale price for homes was nearly $240,000. In the report released Tuesday by vacation-rental management company Vacasa, housing markets were ranked based on their cap rate, a commercial real-estate metric that cross-references the net rental income with the purchase price.

The best place in America to get the highest return by renting out your vacation home – MarketWatch, August 20th

I understand that many of the alt-financial followers refuse to believe that they have been sold a poor bill of goods, and have stood on the sidelines as prices of everything have continued to scale new heights. But this will not change the reality. Take a look at this article from MarkeWatch that came out earlier today regarding the highest capitalization rates of vacation properties around the United States. Below is a list of the cities with a capitalization rate of at least 5%.

I have visited and stayed in Killington, VT many times as it offers some of the best skiing and Summer recreation in the Northeast. I have been to Pigeon Forge and Sevierville, TN as well. They are excellent places to invest.  Keep in mind that those in the alt-financial media are continually professing collapse, because they have a huge bias. They come across as having some sort of deep knowledge and insight, but they all either have a service to sell you or rely on clicks to generate revenue.

If you have cash to deploy, I would slowly nibble away at opportunities as they come up. We know where the world is heading, so plan accordingly.