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The 10 Year T-Note yields only 2.6%. But 18 months ago the rate was under 1.5%. In our current era of supposed central bank printed prosperity the low yield tells us digital currency units have little time value. Current European rates are “negative” for trillions of euros in sovereign debt. Argentina sold 100 year bonds.

HOW DID IT GET SO CRAZY?

The short version is that central banks intervened in the debt and equity markets so much that the financial system is a bit crazy.

What Is Crazy and Unreal?

  • Official U.S. national debt exceeds $20.5 trillion, or about $200,000 per working adult.
  • S. government unfunded liabilities for promised benefits are five to ten times higher than already unpayable official debt.
  • Pension plans at local, municipal, state and federal levels are underfunded by $ trillions.
  • 10 Year Treasury Notes yield less than 2.7% but dollars are devalued more than 2.7% per year.
  • Sovereign debt grows much more rapidly than revenues. How long can that continue?
  • Netflix P/E = 220, Amazon P/E = 330, Halliburton P/E = 218. Caterpillar P/E = 114. Rather High!
  • By many fundamental and technical measures the DOW and most stocks are overbought and dangerous, yet they continue to climb, just like dot-com stocks in early 2000.
  • Many people believe what central banks say. They assume, despite evidence to the contrary, central banks know what they are doing and their actions are beneficial to the overall economy.

Examine the graph of 10 Year Yields back to the year 2000.

The Fed created dollars, purchased debt paper and pushed the price of bonds higher and yields lower. Many intelligent analysts believe the 35 year bull market in bonds (lower yields) has reversed and interest rates will rise, as shown by the above chart.

Higher yields suggest:

  • The market expects higher consumer price inflation.
  • Many dollars will exit the stock and bond markets and move into commodities, such as crude oil, gold and silver. Crude oil bottomed under $30 two years ago. Today it sells at $63. Gold bottomed two years ago under $1,050. Today it sells for $1,330 in today’s mini-dollars.
  • Gold and silver prices will rise when other assets are perceived as dangerous. Bitcoin crashed 50% in one month. Potential Bitcoin investors may “have seen the light” and want something real. I suggest silver.
  • The dollar declines against everything real and most other fiat currencies.
  • Marginal businesses can’t service their debt as rates rise.
  • Banks restrict lending as corporate and individual collateral is impaired and borrowers are less able to repay loans.
  • Corporate debt service increases and net earnings decline. P/Es (already priced for perfection) will decline. Stock prices could plummet. Remember 1987, 2000 and 2008.
  • A 2008-style credit crunch may occur as rates rise.
  • Derivatives could implode due to excessive leverage and rising interest rates.
  • People will question the policies and competence of the Fed.
  • Congress will blame someone other than themselves and The Fed.
  • The search for distractions will intensify.
  • The beat goes on.

Financial distortions, modern monetary delusions and many stocks will reverse. Watch out below, maybe not this week but soon.

Consider graphs of Amazon, Caterpillar, the NASDAQ 100, and the DOW. They look like bubbles with vertical moves, over-bought technical indicators, sky-high prices and unsustainable P/E ratios.

When stock and bond market risks are high and potential rewards are low, it is time to reallocate resources toward commodities and silver in particular.

The (brilliant) Lacy Hunt and John Mauldin said about debt:

“New federal initiatives – whether tax cuts, infrastructure, or otherwise – will not provide a boost to the economy if they are funded with increases in debt.”

(And more debt has been the answer to everything for decades, so don’t plan on a boost to the economy from tax cuts.)

“The Fed’s failure to address over-indebtedness has caused irreversible damage to the economy.”

“… an indebtedness problem cannot be solved by taking on additional debt.” When the only tool you have is a hammer, everything looks like a nail. The Fed “prints” digital currency units and every problem looks like it can be cured with more liquidity and debt. This nonsense is believed by many.

“We’re taking on debt that is not going to generate an income stream, and that feeds financial speculation.” The DOW hits a new all-time high every week, along with margin debt, total debt, and official national debt.

“Therefore, if money is being used for unproductive purposes and doesn’t generate an income stream, velocity will fall.” Velocity is now the lowest since 1949.

But he has a different perspective on interest rates. Mr. Hunt believes interest rates have not hit bottom yet.

“In my view, we will not see the secular low in interest rates until the velocity of money reaches its secular trough, and that is not something that’s going to happen soon.”

But if interest rates fall to new lows, as Mr. Hunt believes, that suggests:

  • Economic Recession
  • Lower equity markets, probably much lower. The U.S. economy has survived a long time without a recession, thanks to massive printing of “funny money.”
  • Expanded “money printing” by the Fed as they attempt to stimulate the economy out of recession, lower interest rates, and minimize bankruptcies.

That massive infusion of “funny money” will weaken the dollar and boost commodity prices, including gold and silver. Capital fleeing stock and bond markets will move into commodities.

CONCLUSIONS:

  • The Federal Reserve and other central banks have intervened into debt and equity markets. They have distorted prices, lowered interest rates, levitated stocks and hurt savers and pension funds.
  • Interest rates bottomed in mid-2016 and will rise from here as the excesses of a 35 year bond bull market are reversed.
  • Lacy Hunt, whose opinion should be respected, disagrees. He believes interest rates will fall further. He also sees irreversible damage to the economy caused by the Fed’s mismanagement and over-indebtedness.
  • Stock indices and most stocks are over-valued, over-bought, and too high. Markets will regress to the mean and that means lower stock and bond prices.
  • Rising interest rates will hurt marginal businesses, over-leveraged corporations and over-indebted families. Debt service payments will increase for individuals, cities, states and governments.
  • The piper must be paid. Expect more consumer price inflation, less purchasing power, devalued currency units, lower stock markets and higher commodity prices.
  • Dire consequences arise from bad policies, excess indebtedness, Fed mismanagement, underfunded pension plans, levitated stock markets, coming distractions and the search for scapegoats.

ACTIONS THAT MAKE SENSE:

Remember that bubbles always implode. By most measurements, the DOW, NASDAQ 100, and many stocks are in bubbles. Higher mortgage rates will crush real estate prices.

  1. If the 35 year bond bull market has turned, debt paper has a long way to fall. If the bond market crashes … it will affect everything.
  2. Expect dollar weakness, stock market corrections and crashes.
  3. The Federal Reserve will take care of … the large banks. You must take care of your own assets.
  4. Move capital from high risk markets (stocks and bonds) into low risk assets such as silver, platinum, and gold.
  5. Silver and gold could be financial lifesavers.

Call Miles Franklin (1-800-822-8080) and buy silver.

Gary Christenson