“Get your facts first, then you can distort them as you please.” No one would believe it, but the stock market has risen 7% during 2016. The news continues to be negative as we enter the final stages of a Presidential election that will be decided in early November. George Soros doubled down on his “Great Short” in September betting the U.S stock market has a big decline in the foreseeable future. He has many accolades on his resume including selling the Indonesian and Russian stock markets short in 1998 reaping billions as the Long Term Capital hedge fund collapsed causing our stock market to drop 12% in one day. More recently he sold crude oil futures short in April 2014 at $100 per barrel as Strategic Petroleum Reserves were released in May 2014 and more in 2015. Oil prices proceeded to drop below $30 a barrel in late 2015. The Saudis and the Frackers flooded the market with supply.
“Apparently there is nothing that cannot happen today.” Commodity Research Bureau’s basket of commodity price, i.e. “the CRB”, recently hit 30 year lows as oil, gas and other commodities have seen prices collapse over the past two years. Federal Reserve Chairwoman Yellen indicates the Fed has a target inflation rate of 2%. Unfortunately, deflationary trade winds are circling the world as historic low bond yields permeate the capital markets in Japan, Germany, the UK, and U.S.
“Never put off tomorrow what you can do the day after tomorrow.” Interest rates remain very low as the deflationary forces hinder worldwide demand, employment and wage improvements. We have included the respective government bond yields for the larger worldwide bond markets:
Yields on Government Bonds
Maturity US Japan Germany UK Australia
2 0.57% -0.28% -0.71% 0.08% 1.6%
5 1.11% -0.25% -0.60% 0.17% 1.69%
10 1.57% -0.08% -0.15% 0.67% 1.97%
30 2.30% 0.50% 0.42% 1.36% 2.37%
“It is better to keep your mouth closed and let people think you are a fool then to open it and remove all doubt.” Maybe found in the Federal Reserve’s book of secrets, Chairwoman Janet Yellen can pull a rabbit out of her hat and overcome the deflationary forces of technological advancements, globalized competition, and the industrial overcapacity in most major commodities. Otherwise, the financial engineering of multiple monetary actions that were supposed to stimulate the economy are proving to be unsuccessful.
“The lack of money, is the root of all evil.” Ultimately, we believe the interest rate structure is being held hostage to the 1.6 quadrillion in credit derivative swaps issued and held by the 9 largest US banks. Sophisticated investors have financed these contracts charging hedge mechanisms 1 to 2% for issuing bond holders arbitrage if interest rates were to dramatically rise. Like a Las Vegas bookie, the investment banking crowd issues the hedges when the bonds are issued. In 2008 and 2009, the meltdown of Lehman, Bear Stearns, and Merrill Lynch occurred when the bookies began calling their loans. Goldman Sachs, Morgan Stanley, BankAmerica, Citicorp, and J.P. Morgan were protected from that “Great Short”.
“Do the right thing; it will gratify some and astonish the rest.” Now maybe, the remaining nine banks are too big to fail. Maybe, these banks have passed some ill-conceived stress test which means they would withstand a run on their banks. With the 1.6 quadrillion of CDS, we believe any or all could go under if there were another “Great Short”. We still believe that resurrecting the Glass Stegall Act from 1934 would fix some of the issues that remain. Separating the investment banking business from the commercial banking complex proved to be successful before, and we believe it would be successful again. Both Presidential candidates have expressed support for this. We believe the financial system could actually raise interest rates which would benefit the Commercial banks.
“You cannot depend on your eyes when your imagination is out of focus.” In our completely deregulated markets, interest rates are set by “the Market”. Mysteriously, bond yields have dropped in the U.S., as well as, the rest of the major bond markets around the world. Coordinated monetary policy by the world’s central banks has been to accommodate the markets with excess liquidity and significant money supply growth. Interest rates kept dropping as the Fed and its world counterparts bought aggressively U.S. Treasury bonds in order to stimulate growth.
“Patriotism is supporting the country all of the time, and your government when it deserves it.” Fiscal policy has been very aggressive to stimulate the economy. The U.S. government deficit has risen from $10 trillion in 2008 to nearly $20 trillion in 2016. The Federal Reserve balance sheet has risen from $825 billion in 2008 to $4.5 trillion at current levels. Bond prices have been bid up which served to drop yields closer to zero. Simply put, Bonds are overpriced.
“The best way to cheer yourself up is to try to cheer somebody else up.” Stock prices have drifted upward in 2016. For the past twelve months, the S&P 500 has risen 17.96%. The market leadership includes information technology, materials, telecommunications, and utilities recording returns of 16 to 21%. Weaker industries include financials, consumer discretion, healthcare and energy returning between 3 to 8%. Generally speaking, the stock market has performed reasonably well despite all of the negative sentiment that has persisted. We remain positive on the stock market believing it is the only game in town. We believe the Federal Reserve will keep growing the money supply for the next six months and possibly see interest rates rise during the summer of 2017.
“The Secret of getting ahead is to get started.” Our investment strategy remains to find dividend yielding stocks which can meet or exceed its dividend from earnings. We remain in telecommunications, selective technology, higher quality energy companies, and industrials which pay dividends. We are avoiding all financial stocks and utility stocks.
We consider it an honor to serve you as your investment manager. We remain committed to finding value in the investment markets on your behalf.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027
(Captions from BrainyQuote.com from Mark Twain)