Select Page

Post #53: Site “hibernation” by end of October 2018; site “(re)awakening” targeted ASAP

Post #53: Site “hibernation” by end of October 2018; site “(re)awakening” targeted ASAP  10/25/2018

Trade weighted US$: 90.69;  US 10-yr: 3.14%;  S&P 500: 2,701;  Oil: $67.28;  Gold: $1,230;  Silver: $14.64

Dear subscribers, dear readers, dear kindred spirits:

To my great chagrin, and with a very heavy heart, I will be suspending site publications for the foreseeable future by month’s end.  At the same time, the current site content will remain online, also for the foreseeable future.  Said is particularly apt given my “restart publications when possible” intention.

The reason is simple and straightforward: I keep spending a lot of time on site content without any compensation while I keep incurring considerable costs (the hibernation will cut costs by 50% – 60%). 

I can no longer afford to do this.  Commensurately, this will be my last post pending the manifestation of the inevitable global asset valuation reset that I have often referenced, and have tried to shed light on, via various publications (posts, reports, and YouTube videos — IF I record any new ones, they will appear on the site thanks to existing links) that extend back over three years. 

That reset, which I predict will go down in financial history books as the “mother of all resets,” should bestow upon me the resources with which to restart publications — including un-audited, theoretical performance calculations with the same theoretical portfolio — without “financial considerations.”  Frankly, and consistent with my publications, I believe such a reset will happen sooner rather than later.  In fact, it is way overdue and could commence at any time.  Overnight.  Literally.  They won’t “ring a bell.”

Caveat: I would be less than honest if I didn’t also state the obvious, namely that I have thought this for years.  Specifically, given our entrenched and increasingly destructive political, financial, and economic situations — both domestically (in America) and globally — our increasingly long-in-the-tooth asset (OECD nation) valuation disconnects/asset bubbles should have ended/popped years ago.  When I say bubbles, I’m referring to bonds, stocks, and real estate.  When I say “reset,” I’m referring to much lower future valuations (NPVs) of bonds, stocks, and real estate triggered by much higher interest/discount rates on the one hand, and what will likely prove to be markedly lower sustainable earnings power on the other hand.  Talk about a one-two punch.

Reversion beyond the mean (not to the mean), or asset valuation history, will come into sharp relief, once again.  This time, however, unprecedented levels of debt, unheralded pension underfunding, tougher demographics (aging), failing productivity (which is why we have out-sized debt growth in the first place), increasingly more difficult to access and progressively less affordable “24/7” energy, consistently more eviscerated property right protections, domestic litigation insanity (2.6x Europe’s), and a stark and ongoing decline in the rule of law are largely global realities that suggest an “unimaginable to many” valuation swing, from boom to bust, is in the cards.

This is both a huge risk for those that hold pricey assets bought at pricey valuation levels, and a historic, reset-based, strategic return opportunity that can be capitalized on in terms of portfolio allocations/re-allocations.  That is, if requisite re-allocations are accomplished prior to an overdue “reversion beyond the mean” bust as regards overvalued assets, which will provide the “intact funds” to purchase “bust valuation” assets as they become available.  Should you have an interest in more granularity beyond the links that I provide here, please see publications on this very topic and on related topics on the site.  The content selections offer considerable depth and quite some breadth.  

Moreover, please consider the pivotal role timeless and true save haven assets (not massively overvalued government bonds issued by bankrupt OECD governments!), namely physical precious metals in your possession purchased at attractive prices (AS IN RIGHT NOW, on October 25th, 2018!), are likely to play as Frankenstein Finance (financial repression) inevitably begins to fall apart at the ugly, sutured seams

As you do so, dwell on the fact that fiat money, especially the incredibly vulnerable, overvalued US dollar*, will be under mounting currency debasement pressure as central banks (CB), due to political realities and CB ownership interests, double-down on balance sheet expansion, thereby “saving” debtors as they continue to “screw” savers by revisiting ZIRP and even NIRP.  Trouble is, with global debt at peerless levels (nearly $250trn at last count) in both absolute and in percent of GDP terms, a creditor revolt is all but a given.  Translation: puny central banks/central planners, you will lose control, which interest rates at the long end will reflect, and with a vengeance.   Yes, Virginia, history will repeat

Life can be a funny thing.  I’ve been “bootstrapping” it (and I have also had an extremely supportive family) trying to bang the valuation pots and pans.  Should I still have a stout, healthy pulse, which I fully expect will be the case, that reset that I keep referring to (I know, a bad word, but at least it’s just “one word”) will enable me to “chime back in” at a time when my food for thought will have much less urgency and much lower potential return prospects than are on offer today.   Like I said, life …   

In closing, I thought it only proper to let you know.  In addition, I also want to take this opportunity to thank my family in the strongest possible terms; without their help, I could have never given this a big push.  Plus, I’d like to thank one dear, nearly life-long friend, Doug, for his endless invaluable input, wisdom, sage advice, help, and solidarity.  Moreover, I’d like to thank my great webmaster; those that became subscribers; those that read/listened to my publications; those that thought highly enough of the overall site content to spread the word; and, most of all as regards the site, those “intellectual brothers” populating the ethical, constitutional corridors of my beloved alt media universe that a) I have been privileged enough to get to know and b) have seen fit to give my pieces invaluable lifts by providing DK Analytics post links on their precious digital real estate, i.e., on their sites.

Dan Kurz, CFA

* – How much would you pay for a heavily indebted, perpetually more indebted, perennially hugely negative free cash flow stock?  Well, America’s the corporation, and the dollar is its stock.  


This commentary is not intended as investment advice or as an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion of the author at the time of writing.  Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not a complete summary or statement of all available data necessary for making an investment decision.  Liquid securities can fall in value.






Post #52: Given that the left still refuses to accept the 2016 US election outcome, we are in a very dangerous place

Post #52: Given that the left still refuses to accept the 2016 US election outcome, we are in a very dangerous place  10/13/2018

Trade weighted US$: 90.69;  US 10-yr: 3.2%;  S&P 500: 2,902;  Oil: $71.34;  Gold: $1,222;  Silver: $14.64

With 2018 midterm elections less than a month away, a return to more representative, less lawless government hangs in the balance:

Trump won and the Republicans are (still) in control of both chambers of Congress, but neither the Democrats, the media, Hollywood, the universities, Silicon Valley, K StreetWall Street, nor the administrative (deep) state have accepted the election results.  Quite the representative government and rule of law pummeling resistance.  Hillary Clinton’s and Barrack Obama’s Saul Alinksy rules for radicals playbook in action.  We see Alinksy’s mobster tactics at work everywhere.  Perhaps the conviction that the left refuses to accept the 2016 election result is best captured thusly:

  • The never-ending Trump Russian collusion witch hunt (if anyone colluded, it was felonious, traitorous Hillary Clinton — and I won’t mention Senator Feinstein’s Chinese chauffeur spy for some 20 years and all her and her husband’s crony Chinese deals). Mitch McConnell, are you listening?  Apparently so, for suddenly you are no longer obstructing the good part of Trump’s agenda, but greasing the skids for it.
  • The unending presidential impeachment threats despite Trump having violated no laws (again in stark contrast to many former Democratic power-brokers); if he had, Mueller’s band of high-powered Democratic operatives would have long discovered it.
  • The absolutely outrageous, “11th hour,” unsupported, and thus concocted allegations of Kavanaugh’s alleged sexual abuse 36 years ago (concluding remarks section) amounted to an ultimately unsuccessful effort to sabotage the election of an originalist/rule of law judge to the US Supreme Court.
  • The threats of impeachment against Justice Kavanaugh and Justice Thomas, should the Democrats retake the House, despite these justices’ impeccable lifelong records both on and off the bench.
  • Top-tier de facto promotion of race-baiting, civil unrest, and/or criminal behavior, from Ferguson, Missouri to Baltimore, Maryland to elected Democratic officials both inside and outside the halls of Congress.
  • And, if all else fails to “reverse the election” — 100% speculatively stated, but I believe rationally and fearfully so given “where we’re at” — then I wouldn’t put it past far-left Democrats, aligned with the deep state, to attempt to assassinate the very top national level Republican officials that are striving for a return to constitutional fidelity, both the elected and appointed variety.  That is, should all other attempts to effectively reverse the 2016 election fail, they will seek to uproot (what remains) of the constitutional order, if necessary by execution.  Why?  Because that liberty-shielding governing blueprint, and  the remaining allegiance to it, stand in the way of their despotic, collectivist path.  This is why the left despises the Constitution.  And this is why the constitutionalists that defend it must be “taken out” at any and all costs, by any means possible, from Trump, Kavanaugh, and Thomas character assassinations to the “real deal.”  At the end of the day, a coup against the Constitution, a nearly dead letter which the left wants to keep down and shred completely, once and for all, is in their sights.  They’ve been at it for over a century.  And they’re not about to stop now.  Which is what we are witnessing.

Perhaps the conviction that the left refuses to accept the 2016 election result AND what it has in mind is best summed up below:

Hillary Clinton: You ‘cannot be civil’ with Republicans, Democrats need to be ‘tougher’

WASHINGTON – Hillary Clinton says the time for civility is over.

After the bitter and partisan fight over the confirmation of Supreme Court Justice Brett Kavanaugh, the former secretary of State and 2016 Democratic presidential candidate declared that President Donald Trump has undermined the integrity of the nation’s highest court and that it’s time for Democrats to be “tougher” with their opponents, in an interview with CNN published Tuesday.  “You cannot be civil with a political party that wants to destroy what you stand for, what you care about,” Clinton told CNN’s Christiane Amanpour. “That’s why I believe, if we are fortunate enough to win back the House and or the Senate, that’s when civility can start again.”

Guarded hope:

Nevertheless, allow me to ask you this: what can possibly be better, more uplifting, or sexier (besides sex itself) than learning about the peerless proclamation and codification of individual freedom (which required/requires a civil society and personal responsibility to function) attained by the Founders (via the Declaration) and the Framers (via the Constitution) of this greatest freedom protecting republic ever designed?  And I state this despite imperfections, most especially sustaining slavery (which was addressed by ethical men thanks to the Declaration’s ideals) in order to have greater critical mass with which to declare independence against the most powerful nation in the world at that time.  The answer: the only thing better than learning about freedom is enjoying it. 

But enjoyment can only be sustained if understanding is widespread enough.  Hello effective civics courses as one such platform, the most important being sustained parental guidance and wisdom. In short, hello education versus indoctrination or demagoguery — hello “charter schools?”

Specifically, widespread citizen awareness and appreciation is required that a) freedom was secured at an extremely high cost in blood and treasure and thus needs to be cherished and nurtured, b) that eternal vigilance and possibly risky intervention will be required to maintain freedom, and c) that true freedom (as per the “negative rights” that restrict government’s imposition on to natural rights also known as the Bill of Rights, which depend on stout enumeration of limited power, separation of powers, federalism, and sound money as a foundation) is an incredible — and incredibly uncommon – state!  

This is especially true given that once very rare freedom is lost, status quo tyranny of one or another sort inevitably resurfaces.  Sometimes would-be despots stoke Balkanization; in America’s case, they seek unbridled third world amnesty and a related property rights transfer that will result in one-party government, such as in Sacramento, California, from “coast to coast.”  One party government is tyranny. 

If one-party government fails, the left has also been pursuing widespread civil strife and even anarchy, which is threatening to establish itself right before our eyes in numerous OECD nations, not just in America.  The left has been pursuing these dual strategies with increasing vigor and success for decades, which is is a prelude to one or another sort of tyranny and widespread citizen impoverishment.  The despots’ mantra is always the same demagoguery: we need to “save the people from themselves.”

Arguably, the fact that civics is still taught effectively to about 25% of US public school students represents a small ray of hope and a much-needed positive kick in the pants given the de facto collectivist, pro-amnesty takeover of most of the educational establishment, the media, and Hollywood.  In admittedly quite overstated terms, a “the Flag that was still there” revelation, but only if massive third world amnesty and the ever increasing teaching, language, financial, and Balkanization challenges can be capped in short order, else our society and culture will have been completely overturned not by war, but by immigrant love.

Couple this with the laudable fact that Florida and select other state public school students still start each school day with a “national family bonding,” “liberty and justice for all” Pledge of Allegiance, and you at least have a bit of “structural daylight” at shining into long “orchestrated darkness,” which is the antithesis of transparency, equality before the law, freedom, and a sustainable federalist, representative, constitutional (rule of law) republic.  

In a related sense, if only we could get back to sane, “digestible,” English as the only official language, US culture-centric, meritocracy-based, non-property transferring immigration before it is too late.  Clearly, if the Dems regain power at the federal level at the upcoming election, that is the beginning of the end of Trump’s attempt to return the US to a “meritocracy-based” immigration policy.  That is, if it is not too late already, given the huge, largely un-assimilated, citizen property-transferring Latino constituency that is increasingly populating this land, and how threateningly well former Colorado governor Dick Lamm’s infamous plan on “how to destroy America” has worked — as codified and materially enabled through the 1965 Hart-Celler Act.

Clearly, hope, while “smelling the coffee” and making an “enlightenment” difference locally to those on the fence or willing to listen/comprehend while we vote for constitutionalists (this November will be a watershed election in the US) and encourage others of like minds to also vote for constitutionalists, is more important than ever.   This is particularly true given where we may be headed — and possibly really, really soon — namely toward an irreconcilable civil split, possibly even a civil war.  Why?  Because the left refuses to accept the 2016 election.  At any and all costs.  Seriously.

Moreover, a “liberty, revisited” call to arms is especially apt if we dwell on the fact that a stout, vocal, committed minority can effect huge, constructive change.  For flavor, consider that only about 30% of the American colonists were willing to have a go at an all-powerful industrial and military nation led by a despotic British King, yet look at the terrific outcome and the US Constitution that ensued, which has outlasted any other, by far, however marginalized by sustained and spreading infidelity.

And, unlike last time, this time around we have the Founders’ (Declaration) and the Framers’ (Constitution) manuals – the invaluable frameworks upon which individual freedom, happiness, and widespread, unequaled success and prosperity were built – ready to dust off and revisit.   Yet, soberingly, this time around the “enemy is from within.”  Translation: it’s much easier to fight an external foe than an internal cancer.  But what choice is there for freedom-loving people, especially as America is the only nation that is based on a Declaration manifested in a Constitution whose goal it is to strictly ring fence governmental power while simultaneously protecting against “mobocracy.”  The resulting blueprint strictly limited and enumerated powers.  It gave us separation of powers: let the mighty fight, check, and balance out each other other instead of us.  It bestowed upon us federalism: power was mainly domiciled in the states that gave birth to the nation.  It gave us sound money, thereby preventing politicians from buying votes from an empty purse (redistributionism) while limiting cronyism.  And, as insisted upon by the state-based Framers when they signed the Constitution, the first amendments spelled out natural-rights that can’t be voted on, today known as the invaluable Bill of Rights.

If America loses liberty (freedom married to responsibility), then how is the rest of the world going to either keep theirs or establish it in the first place?

To avoid losing what’s left of an ever shrinking circle of individual liberty, in November 2018 the Republicans must hold the Congress, but especially the House, where impeachment emanates. Otherwise, it is highly likely that the US government will fall into a diabolical, endlessly intimidating, paralyzing political abyss wherein the impeachment of Trump will be pursued relentlessly, and a return to the rule of law for all citizens will be either highly threatened of dashed, potentially for good. 

Investment implications:

As mentioned elsewhere both in posts and in videos, the currently extremely elevated level of political uncertainty, on top of huge financial and economic challenges, is particularly threatening to those with property (invested capital or savings).   Today’s reality should impel investors to insist on steep risk premiums when purchasing bonds or stocks (and, by extension, real estate).  Stated differently, bonds should offer very high yields, stocks should sport very low P/Es, and real estate ought to provide stout bargains (rental income should pay for ongoing mortgage outlays and take a good-sized bite out of maintenance costs) if they are to be purchased.  In short, the utter opposite of today’s pervasive bond, stock, and real estate bubbles.

And if the erstwhile representative, federalist, constitutional republic known as the United States gets a new “rule of law” lease on life, it will only happen IF unconvicted felons, which appear to have occupied numerous positions of great power in the US federal government, from cabinet posts (such as both former secretaries of state and both DOJ heads of the former Obama administration) to heads of extremely powerful agencies such as the IRS, the CIA, and the FBI, are indicted and tried: 

For absolutely outrageous “over-the-top” flavor, consider Hillary Clinton.  The felonious former secretary of state destroyed massive amounts of evidence while gravely violating classified information security protocols with her private servers, and thus gravely threatened national security.  Yet, she was effectively exonerated by former FBI head Comey, who had the temerity to a) usurp judicial power and b), at the 14-minute mark of his self-righteous July 5th, 2016 tirade on this matter, warn that “everyday” Americans, in contrast, would be held accountable: “this is not to suggest that in similar circumstances, a person who engaged in this activity would face no consequences!”  (When there are two sets of laws, one for the mighty who stand above the law, another for the rest of us who have to abide by the law, a society by definition cannot have the rule of law.)

If the full extent of US government lawlessness is exposed by virtue of the unindicted officeholder felons being convicted and then tried, complete disclosure regarding the federal government’s GDP-eclipsing $21trn of unaccounted for spending is forced (instead of swept under the ruling mob’s rug under the pathetic moniker of “national safety nondisclosure”), and those that perpetrated the unappropriated, and thus unconstitutional, spending are brought to justice, investor confidence in the US legal system and in its currency will be crushed.  By extension, US assets will be sold on a huge scale, driving down the value of those assets and the dollar in which they are based.  For a nation that a) requires roughly $600bn in foreign funding to cover its net annual trade deficit,  b) owes the rest of the world (ROW) $8.6trn, and c) has long counted on the ROW to finance a material portion of an expansive federal government deficit (a sizable portion of what the Fed didn’t monetize and lacking domestic savings couldn’t cover) that has averaged approximately $1trn a year for a decade (if measured by the average annual growth in US government debt), this is no academic matter.    

Such a dramatic cleansing would also be an overdue “cleansing,” which only a sustained Republican majority in both the Senate and the House combined with a functioning Department of JUSTICE could trigger, i.e., if they are “clean enough” and “un-intimidated enough”  at the key decision-making levels (Mitch McConnell? Paul Ryan? Jeff Sessions?) to even contemplate doing the politically unthinkable, but rule-of-law essential.  Given how incredibly deep and broad the US federal government core rot is (why else has no one been indicted on either side of the political aisle?), this is not an idle concern.

Such a cleansing would be an arguably last chance for America to shed its current de facto, but largely still unrecognized, banana republic (versus representative, rule of law republic) status.  And, once again, that lacking recognition constitutes the fleeting opportunity for investors to sell overvalued US investment-grade assets purchased at or near bubble valuation levels — investors that purchased investment-grade US assets at mere fractions of today’s prices/valuations should stay put, because they have already locked in attractive P/Es and yields and a “hold” policy here will prevent sizable tax hits for non-tax-sheltered investors.  In any event, boom will turn to bust, whether “US patriots” are able to force cleansing or whether the sustained corruption and criminality drive the country into an ever deeper political, financial, and economic ditch with progressively lower levels of investor confidence.

Either way, terrific bargains will beckon, although a cleansing would likely trigger an even faster and deeper “reset” of asset values.  In the meantime, buy some portfolio insurance.  Get out of high purchase price paper assets and derivatives of same that won’t be able to perform; recall 2008 and non-performing banks.  Remember the Long-Term Capital Management collapse in 1998 that almost triggered a global financial meltdown.  Buy timeless capital preservation and purchasing power protection assets, unloved and deeply undervalued, in OECD fiat currency terms, gold and (especially) silver.  

Dan Kurz, CFA

This commentary is not intended as investment advice or as an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion of the author at the time of writing.  Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not a complete summary or statement of all available data necessary for making an investment decision.  Liquid securities can fall in value.

Post #51: some youtube queries related to a recent video tied into post #47

Post #51: some youtube queries related to a recent video tied into post #47  10/4/2018

Trade weighted US$: 90.11;  US 10-yr: 3.2%;  S&P 500: 2,902;  Oil: $7463;  Gold: $1,206;  Silver: $14.67

Allow me a somewhat different post. 

A gent shared the following with me on the heels of my most recent youtube video titled “Financial and economic challenges juxtaposed against bubble valuations:”

“What are your thoughts on a collapsing bond market in a rising interest rate environment?  Is it difficult to sell Treasuries when buyers know that the bonds will fall in value as the next higher interest rated bond series will have better returns?  I ask this because if money stays away from the massive bond market, where will it go?  Will it keep flowing into the stock market?  Even if it is precarious?  Such an unknown future.  And I assume the value stocks you mentioned would have to have minimal exposure to interest rates?”


My two-stage 10/4/18 youtube response was as follows, with stage one directly below (I’d be remiss if I didn’t tell you that I tidied up and slightly improved my response here, but the message and most of the text is essentially what you can find on my youtube channel response — trust, but do verify, as the GREAT Ronald Reagan said):

Hi Mike: thank you for your observations.  I apologize for my somewhat tardy response. Under the hopeful moniker of “better a bit late than never,” let me take a few stabs at your questions, which are very apt/topical.

In so doing, I’d like to refer to the stagflationary 70s as a understated preview of coming attractions. In that era, and as mentioned in the video you kindly reference and as I also referred to in a few posts, we actually had US stocks lead US Treasuries into the crapper.

Let me see if I can position the great  chart that I reference into place below (, figure 8):


I am back down here. Hope this chart copy/paste effort works on youtube. Life is an adventure! My bigger point: falling stocks could ultimately “lead” falling bonds higher, as in the era (the 70s) I believe we are likely to revisit, but on steroids this time around.

Plus, and this is the biggest aspect of all, in my view, we are going to have a monetary crisis when investors realize that there is no escape from monetary debasement purgatory.  That is, as I hope I said fairly well, bonds are ultimately reflections of the soundness of the currencies in which they are based. With the Potemkin village dollar about to smell the “emperor wears no clothes” coffee (there is no sustainable growth/productivity, there is are no sustainable interest rate increases possible given our winded, big government, mis-allocated, heavily-indebted, regulatory and litigation-mired economy), the most overvalued junk currency of all is going to take a big, big hit.

I don’t think there will be a recovery for a long, long time (it took decades to get into this mess, and you don’t get out of it in a Trumpster N.Y. minute, for God’s sake!) from the upcoming hit. Other nations, esp. those with mercantilist trade policies, will move to weaken their currencies relative to the dollar, which means they too will likely engage in (MORE) monetary debasement as well.

Thus, I don’t think, with $250trn in global debt (or almost) and some $16trn in central bank balance sheet expansion, that we’ve seen anything yet! Which brings me back, admittedly in a round-about but hopefully still logical way, to your question. Where will all the money go that’s sitting in bonds (a huge chunk of the $250trn).  Well, part of the answer is that a lot of it will be destroyed in an era of rising interest and, thus, discount rates (relates to stocks and RE and leases).

We all know what happens to the value of government and corporate bonds when the market suddenly (it usually happens pretty fast, and then keeps on truckin’) requires greater risk protection (against insolvency and inflation, which is a stealthier form of insolvency “until it isn’t,” hello Venezuela, Turkey, etc.).  Investors’ bond holdings collapse in market value, in line with their capital, unless they want to wait until maturity, if it is a somewhat solvent debtor, to get their “debased” bonds back while forgoing market interest rates in the process as they remain “locked in.”

Same goes for stocks. The printing press can levitate bond and stock values beyond any semblance of price discovery or rational valuations (which price in constructive odds of earning a real return and capital preservation).  This IS precisely what we’ve been seeing for the past decade. When this no longer works, i.e., the printing presses either run in reverse (Fed QT) or when the central banks start up their electronic printing presses in untold, even more currency destructive lines led by the Fed, then at some point confidence in fiat currencies is lost, and bonds take a hit, and another hit, and then it feeds on itself until we go into manic low bond values, manic high bond yields.

Point being: when you invest money, you no longer have money, you have bonds and stocks (and RE) based in a fiat currency –hell, you no longer have money when you deposit in a bank, save for a stub, but that’s another dangerous story. In any event, my point is that the value of those assets can shift dramatically for a host of reasons, from perception to reality, from boom to bust. Thus, when you go to sell and thus go back into cash (which really isn’t if it gets deposited in a bank account, buy select short-term OECD gov’t debt instead), you may only have a fraction of the money back which you invested. It’s exactly the above which I think will happen.

Most, or at least many, investors will get stuck in the reset take-down of bond and stock values. Their unrealized gains will turn into unrealized losses. So their reallocation firepower will be much reduced. As will their net worths. But in the process, I am firmly convinced that the HUGE global creditor constituency will pummel bond and, by extension, stock valuations (the trigger being currency or monetary crises uncorked by USD destruction).

If only 1% or 2% or 3% of creditors get worried and begin to sell, that’s from a few trillion dollars to nearly $10trn looking to sell. Add this to the $10trn plus in new global debt (and between $2trn and $2.5trn, if not $3trn, including the net trade deficit, in new aggregate American debt BEFORE an even weaker economy) and a Fed throwing another $600bn into the even bigger bond fire sale nearly straight ahead of us, and I can’t help but think that we are going to have massively lower bond prices/hugely higher yields before all too long.  (Confession: I have been saying this for quite a while.)

Said is ESPECIALLY apt as soon as investors can no longer assume (pretend) that financial repression has worked, and that we can get out of currency debasement (QE, ZIRP, NIRP) purgatory after all. In a related manner, the buck and US government bonds may have a brief and oh-so-erroneous flight to safety tailwind.  But this time around, for all the above reasons, I believe it will prove very fleeting, which will then serve to reinforce the downward pressure on both the buck and US bonds, which will spread globally as we inevitably slide into an even more pronounced global currency devaluation contest for political reasons.

So where will the rapidly vanishing “invested money” go for shelter, for capital preservation, for solvency protection, for inflation protection?  I can only speculate, just like everybody else.  But I would speculate the following:

  1. I think investors will reallocate into very short-term OECD gov’t bonds with some semblance of solvency because there are no bail-in risks, because there are no solvency risks (printing presses can repay you), and because there are no bond value implosion risks associated with long bonds with huge valuation exposure to rising interest rates, particularly hugely rising interest rates. (Ironically, as govt’s cost of financing on the long end will rocket higher, they will likely be able to tap into oversubscribed short-term financing, which they will need given how much larger their deficits will become.)
  2. I think investors will shift into real scarcity assets, led by scarce ag and scarce dense energy assets. These are not only vital to sustaining life for 7.2bn plus people, but these assets underpin the leveraged output that allows us to generate income in the first place (fossil fuel exploitation).
  3. I think investors will seek the only true save havens, physical gold and silver (no paper crap, because it is an un-backed scam of criminal proportions).
  4. I think people will try to take what they can out of an imploding global asset bubble in bonds, stocks, and RE and “flee” into economically viable local businesses, which have often been starved of capital in a crony capitalist world, as our world is going to get a lot larger again. I think investors, at least at the margin, will do this for a whole host of holistic, quality of life, ethical, and bottom line reasons, including greater control.

In closing (almost), and sorry about the length of this — I may just try to leverage this into a post! — everything happens at the margin, Mike, as we both know. Prices are determined at the margin. Just ask central banks and their “10-year old tail wags the dog” puts. When perception changes, be it based on the Fed’s QT effort, or that the central bank tail will be overwhelmed by the $250trn global creditor dog, bond NPVs/valuations — and everything tied to them, and I mean everything — can change quite quickly (sorry, grandma), whether you are in Australia or in Germany or in Japan or in Canada or in America.  Most important, in my view, is that  you are in the right kind of “investment grade” bonds, namely short-dated ones, which won’t get whacked by the upcoming global interest rate surge.

Let me see if I can copy/paste a Fed chart on the US 10-yr bond into place below here to try to drive home the quite quickly point as people forget what happened in the 70s or 80s, or just weren’t around, like your oldster but lovin’ it author, Dan (Hope this all works, and that I didn’t just charcoal an hour or two, because as of tomorrow I’m off to my substitute teaching “moonlighting” for three consecutive weekdays, so I will be a bit Internet shy for a while).  Oh yes, and that chart!  Please see below.  And take a look at how fast the rate climbed from 8.8% to 12.6%, or from 10% to 15.4%!  How does in less than a year sound?!


My second-stage youtube response, also from earlier today, was as follows:

Sorry, Mike, missed one thing — you’d think that my “over the top” response would have at least captured everything!  Here goes: I think value stocks will also get hit, should interest rates/discount rates rise smartly (what I believe is in store). But, given their shorter lower P/Es/de facto shorter durations, they should get hit significantly less than growth stocks.

In post #47 I go into this at some length. I also offer a NPV calculation for both value and growth stocks. One is at a lower discount rate (today’s), and one is at a higher discount rate (I believe tomorrow’s). The rising interest/discount rate “hit,” which is more of an indicative effort than a precise calibration given the “dismal science” and given assumptions that are intelligent guesses based on human nature and not on the immutable laws of nature/physics, is as follows:

My value stock example (links provided in post) would decline by 38%, the growth stock (linked to the Russell 2000) would shrivel by 48%. Point being: unless you’ve purchased great investment grade stocks at a fraction of today’s prices years ago which currently offer you very low P/Es (based on your purchase price) and very juicy dividends (based on your purchase price), you should consider “letting go” and facing tax consequences as applicable given your jurisdiction.

In my opinion, which is based on our political, financial, and economic landscape juxtaposed against bubble valuations, most stocks are going to get clocked.  Widespread bargains should be available within years, if not substantially sooner (as in perhaps months), that will likely remind us of the 70s stagflation valuations.  I’m referring to metrics (doesn’t that new age word sound so cool?) such as P/Es of 6 or 7, E/Ps of 14 or 15, and dividend yields of 8% plus.

Hope this lighter than usual post provides some useful questions courtesy of a fine, knowledgeable gentleman by the name of Mike (questions that you may also be pondering) as well as some worthy of your time” attempts to address them by yours truly.  I also hope that this unconventional piece puts a little smile on your face or elicits a “yup, that’s true” response once or twice as you read it.  

Dan Kurz, CFA

This commentary is not intended as investment advice or as an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion of the author at the time of writing.  Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not a complete summary or statement of all available data necessary for making an investment decision.  Liquid securities can fall in value.

Post #47: With rising interest rates, if you must buy, purchase “value” vs. “growth” stocks — AND THEN SOME  

DK Analytics, Post #47: With rising interest rates, if you must buy, purchase “value” vs. “growth” stocks — AND THEN SOME  9/20/2018

Trade weighted US$: 90.03;  US 10-yr: 3.08%;  S&P 500: 2,908;  Oil: $71.66;  Gold: $1,212;  Silver: $14.34


A historical interest rate perspective — the US & the world have never been so indebted in both relative to GDP and in absolute terms, yet look at our interest rates:





The real risk-free rate since 1311 (translation: risk-free, inflation-adjusted borrowing cost or interest rate)

Source:  For flavor of what higher discount rates would do to the current S&P 500 valuations, click here.  


First, after a decade of global financial repression now reversing, US stocks (and part of the world’s) are pricey prior to an overdue recession that should pummel EPS:

S&P 500 P/E based on trailing 12-month GAAP EPS

Source:   Mean P/E: 15.73; Median P/E: 14.73; Min P/E: 5.31 (Dec 1917); Max P/E: 123.73 (May 2009)

In terms of the 25 P/E multiple, consider that S&P 500 EPS are being legislatively “juiced” (lower tax receipts amidst record and growing federal government spending) into very transitory double-digit growth.  Contrast this with  from otherwise very pedestrian, low single-digit GAAP-based EPS growth between 2006 and 2017 (p. 2)

In particular, that “juice” is coming from a pronounced one-time reduction in the combined corporate tax rate (when considering federal and state levies, from nearly 40% to 25%), from massive profit repatriation under a lower repatriation tax (in the main, 15.5% vs. 35%), and from the ensuing record, possibly $1trn plus, repatriation-fueled stock buybacks.  Upshot: 2018 S&P 500 EPS, which are tabulating stout 18% year-over-year growth through Q2:2018, would be much lower — and the S&P 500 P/E would be much higher — were it not for these unsustainable (one-time) developments. 

This is thrown into sharp relief when examining the lackluster average EPS growth of  2.8% p.a. between 2006 and 2017.  Punk average GAAP (“true”) EPS expansion has long lacked stout organic (top-line) growth, which is unsurprising for nominal annualized EPS growth cannot consistently outstrip nominal annual GDP growth (slide 3), an “econ 101” given.   What is more embarrassing, and also frankly foreboding, is that despite unprecedented a) debt-financed share buybacks with “cheap money” that are looking eerily like “public LBOs,” b) domestic personnel reductions, and c) stagnant nominal cap ex and the ensuing moderating depreciation expense (in a nutshell, “corporate anorexia“), 2.8% EPS compounding was the best that a massively overpaid, stripped of parallel strategic interests “C-Suite” could “conjure up” from 2006 to 2017. (And yes, Virginia, we do have to deal with EPS eviscerating recessions, which haven’t been render obsolete, and with huge restructuring charges in continuing business lines, when looking at longer-term EPS compounding.)  

The financial engineering-driven (versus real engineering-paced), anorexic, American C-Suite legacy threatens to magnify EPS compression prospects during the next recession from both corporate debt encumbrance and from weak product portfolio vigor perspectives.  A run-of-the-mill, 40% -50% EPS reduction, magnified by the ephemeral tax rate reduction and repatriation-driven “shooting star” EPS surge we’re witnessing, might be substantially exceeded to the downside, and stock buybacks at bubble levels will invariably (again) be followed by EPS diluting secondary stock offerings at “bust” stock prices, adding insult to thinning earnings slice injury.


Second, as bond and stock valuations are tied at the hip, rising rates have a similar impact — “bonds and stocks travel together:”

  • An increase in the return sought will cause a reduction in the NPV of the benchmark bond (the 10-year Treasury).  This is expressed as a rising bond yield and a falling bond price.
  • The same holds true for stock valuations/NPVs.  When the discount rate (benchmark interest rate plus risk premium) rises, P/Es and stock prices (S&P 500) fall, and the “E/P,” or “earnings yield,” rises.
  • Thus earnings yields and bond yields move in tandem:


Please note: if had continued to use appropriate, GAAP-based S&P 500 EPS, instead of bloated/devoid of recurring restructuring charges EPS as of Q3:1988, the mid-September 2018 four-quarter trailing E/P — or earnings yield — of the S&P 500 would be 4.0%, not 5.2%, as stated in the above chart.  Looked at another way, investors should be seeing a S&P 500 P/E of 25.2, not 19.3, as a 5.2% E/P implies.  And, BTW, all those analysts claiming that recurring restructuring charges (delayed, typically massive expense recognition in continuing business lines also known as “big bath accounting”) can be “ignored” when examining EPS also eagerly tout the higher ROEs achieved thanks to the charges-based equity hits, which obviously magnify future returns on equity!  How does one spell “hypocritical” or “disingenuous?”  Fortunately, the market can see through some of this, which is why banks and other financial entities prone to large periodic loan or asset write-downs are typically awarded only niggardly P/E valuations.

Beyond understated P/Es and overstated earnings yields, and of arguably useful historical valuation insight given a more virulent form of stagflation (’70s on steroids) that we are steering toward, note that approximately a year prior to the height of the bond market collapse in September of 1981 (the 10-year Treasury’s yield reached 15.2%), the S&P E/P (earnings yield) topped out at a staggering 14%A S&P 500 E/P of 14 is the equivalent of a P/E of 7.1, a mere 28% of today’s S&P 500 P/E of 25.2.  Such a valuation, which I strongly believe is a preview of coming attractions given our political (cratering trust/confidence possibly dead ahead given widespread lawlessness by those controlling the levers of power being exposed), financial (unparalleled global QE, financial repression-enabled debt mountains, and $21trn in unaccounted and unappropriated US government spending), and economic (faltering productivity and rising inflation) “landscape,” will bestow upon equity investors a “generational” buying opportunity.   

Caveat: the upcoming equity bear market may well be of a very protracted nature.  Nevertheless, outsized returns are made “in the buying,” meaning purchasing select “survivor,” big cap, crony, and/or vital resource stocks (in essence, S&P 500 type shares) featuring single-digit P/Es, double-digit dividend yields, and relatively robust odds that dividend payments can a) be maintained and b) be sustained at current levels, or at least at a substantial fraction (say over 50%) of current levels.  This kind of “late ’70s/early ’80s” buying opportunity, when stocks were panned, will be revisited, we believe sooner rather than later.       


Third, if you absolutely must buy (we’d wait for widespread bargains), lower P/E value stocks are less susceptible to rising rates than high P/E growth stocks:

During periods of rising interest rates (and let’s not forget that we have reversion beyond the mean, not reversion to the mean!), especially from historically very low levels such as today, investors, to the extent that they: a) have to remain invested in stocks and/or b) have “recent vintage/expensive” exposure to a very overvalued stock market, ought to shift equity exposure into value (lower normalized P/E) stocks from growth (high normalized P/E) stocks.  Very importantly, investors in Blue Chips that offer high or very high dividend yields thanks to low historical acquisition costs (low split-adjusted stock prices), or in established growth stocks with low P/Es thanks to low comparative purchase prices that date back a decade or decades ago, should stay put!  You already have what others are waiting for, so don’t sell; you wouldn’t sell a delightful, spacious home that you purchased for $38K in leafy, beautiful Niskayuna, NY (where I grew up) just because similar houses are fetching $250K – $300K, because you have already locked in a low cost base, save for “criminal,” perpetually rising (way beyond inflation) property taxes, which would admittedly dilute the validity of this comparison, but not the big picture point.

In a few sentences, and a bit oversimplified but arguably a good starting point for your own analysis for those requiring “perennial equity exposure,” part with FAANG stocks with a current average P/E exceeding 100 and examine the few relatively attractively valued, relatively low P/E names still out there for possible purchase (you’ll need patience, and most will typically go lower after you’ve taken your initial position, so if fundamentals unfold constructively, “dollar average down”).  Given the likely economic, financial, and wrenching political/geopolitical storm that we are stepping ever more deeply into, focus on cash flow-stout big caps in out-of-favor industries with strong K-Street ties that have gotten slammed, and hopefully for the wrong reasons, at least strategically speaking.   The reasons for this are straightforward:

  • The NPV (net present value) or the market cap of lower P/E stocks is less susceptible to compression thanks to the fact that current or near future EPS are high relative to the stock price.
  • The opposite is true with growth stocks featuring puny current earnings power compared to the stock price (high P/Es).  Here, investors are betting on very significant future EPS growth.
  • When investors discount back a “growth stock” EPS bonanza that will lead to a more reasonable P/E years down the road, it’s not too different from valuing a very low-yielding 10-year Treasury, a 30-year Treasury, or even a 15-year zero coupon bond.  Reason: something called “duration,” which is the weighted average term to maturity of the cash flows.  In the vernacular: the further out beefy EPS residuals are, the more susceptible the stock price (the NPV) is to shifts in the discount rate — an interest rate plus a risk premium (shareholders’ bottom line is known to dip into the red while bondholders get paid in full short of bankruptcy reorgs, thus the risk premium).
  • A great rule of thumb: purchase growth stocks (long-duration, high P/E, huge multiple of book value equities) when inflation and interest rates are high, and sell them when they are low (as in now).  Contrarily, buy value stocks (low P/E and low price/book ratio equities) when inflation and interest rates bottom out (as appears to be the case today) and sell them when inflation is surging, and interest rates are heading higher).

Motley Fool recently highlighted “bludgeoned” value names, courtesy of  their valuation screens, which spat out AT&T, Horizon Pharma, and “Mickey Mouse.”  T & DIS trade for a whopping 40% discount — or a P/E of 15 — to the current S&P 500 multiple.  Such equities are great places to begin due diligence efforts for qualified investors, who also require at least a modicum of diversification (don’t just buy one!).

With a few keystrokes devoted to a cursory glance at potential “value names,” let me now take a stab at the NPV impact from rising discount rates (benchmark interest rates plus a risk premium for losses and total loss of capital risks) on a value stock and on a growth stock.  The point: to give readers a top-down glimpse into value and growth stock valuations (NPVs, or stock prices) during a secular bond bear market.  Based on history, bond bear markets (rising yields) can extend for decades.  Note that our current bond bull market is 37 years old

First the “hit” from higher discount rates to a hopefully somewhat representative value stock (in today’s nosebleed valuation stock market).  Below that, the same rising discount rate math “hit” on a hopefully somewhat representative growth stock in the same bubble valuation market.  Clearly, nominal EPS growth expectations can be altered with considerable NPV effect.  That said, I’ve tried to use at least somewhat realistic EPS compounding assumptions on the value and “established” growth stock fronts over a span of three decades (more details on this in the calculations below as well as in the closing remarks). 

The value stock’s price compression in a pronounced bond bear market that has the discount rate going from 4% (30-year Treasury yield plus 100 BPs) to 10% (note that the 30-year Treasury reached 15.2% in September 1981) results in a 38% stock price (NPV/estimated intrinsic value) decline.  On the growth stock front, the same discount rate dynamic pushes the stock price’s estimated intrinsic value/NPV down by 48%.  I have not tried to capture the reduced economic growth much higher interest rates in a highly indebted economy would cause, but I have called this out in post #42.  Suffice it to say that lower shareholder EPS growth would be likely in an environment where new creditors would experience nominal (and ultimately real) yield deprivation relief, i.e., some version of the “1981 stagflation protestation pinnacle, revisited.”   And this is prior to any potentially metastasizing trade war, which would have profound inflationary (QE responses) and recessionary — or at least stagflationary — implications.

The resulting NPV calculations are solely efforts to give a sense of the magnitude of stock price compressions from sharply rising discount rates for value and growth stocks.  This “top-down” exercise incorporates  the impact of stoutly rising — but not historically unprecedented (especially when considering much, much lower US and global public indebtedness in the early ’80s) — interest rates on stock prices in NPV terms.  In so doing, the discount rate increase assumption is beyond that was used in an earlier piece on this topic (post #25), which dealt with the S&P 500 Index.  The reason: individual stocks obviously carry much higher risks than the S&P 500 as a whole from a host of perspectives.  The calculations:

NPV of relatively low P/E, low growth (value) stock currently trading at $15 with a 4% initial discount rate#:



NPV of high P/E growth stock with a current “Russell 2000” 59 P/E or $59 valuation with a 4% initial discount rate#:


Source: author calculations using Excel financial functions combined with author EPS growth and interest rate/discount rate assumptions  


The bigger point, revisited — and expanded:

The bigger point, as addressed both above and with considerable detail in post #25, is that rising interest rates — and the discount rates on which they are based — will punish both bond and stock valuations as they are both discounting mechanisms.  This is equally true for most other assets, including mortgage-encumbered real estate and leases of all virtually all sorts.   Discount rates, or benchmark rates with shareholder  premiums on top, could fatten substantially beyond benchmark rate increases.  We haven’t dialed this in; we have, however, assumed a stout bear market in bonds without assuming a reversion beyond the mean, ’70s-style bust.  But a fattening discount rate is exactly how we got a 14% earnings yield on the S&P 500 some 39 years ago (figure 8), as the S&P 500 earnings yield (E/P) raced ahead of the 10-year Treasury yield from the early ’70s to the late ’70s, only to be finally “eclipsed” by a raging bond bear market thereafter.  

Outsized discount rate expansion (beyond benchmark interest rate increases) would be particularly true should generational “shareholder equity enchantment” morph into generational “shareholder equity disenchantment.”  Disenchantment would surely beckon if rising discount rates were also accompanied by “beyond the mean reversion” of an increasingly unsustainable, 37-year rise in net US corporate profits as a percent of US domestic income (essentially the flip side of GDP; please see chart below), setting the stage for a “dual-tier” stock value compression.

Noteworthy, and unsurprisingly, four decades of rising American corporate profits are juxtaposed against a 45-year slide in compensation of US employees as a percent of US domestic income (“labor’s share;” please see second chart below).  A sustained trend reversal here — despite all the AI and robotics worker displacement/termination headlines, which frankly remind this author of how the ag revolution was going to permanently wipe out income for most Americans, most of which worked on farms at that time — would constitute secular profit pressure.  This would amount to a shareholder double-whammy if accompanied by rising discount rates.   (Or perhaps if machines render a huge portion of the workforce academic and thus unemployed, despite the millions of likely well-paid new jobs AI and robotics should result in, then maybe corporate taxes will need to surge to finance “universal income” or some such travesty, indirectly still leading to potentially lower corporate net profits, especially if this a global trend that renders “overseas labor outsourcing” obsolete.  How does one spell “shareholder disenchantment.”)




Such shareholder disenchantment, and the associated low P/Es,  has happened in decades past for a decade, and sometimes considerably longer.  With near-record low interest rates set to rise amidst sharply increased and absolutely unparalleled US and global solvency risks, the associated low growth risks, and much higher QE-induced misallocation and monetary inflation risks, value stock market caps should suffer less than growth stock market caps.

Last but not least as regards the bigger point theme, I’d be remiss if I didn’t call out the humongous dense energy availability, affordability, and misallocation challenges that could render everything else discussed here and elsewhere academic.  Those same challenges threaten the very leveraged output, much less (revisiting) sustained productivity advances, that are key to enabling continued robust shareholder returns on equity and solid returns for all capital providers, including the unprecedented amounts provided by creditors, many of which represent increasingly imperiled pensioners:

Sources: Institute of International Finance and 


Caveats and closing thoughts:

To reiterate, both EPS growth and discount rate assumptions hugely impact NPV outcomes, making intrinsic value estimates derived therefrom rather tenuous.  Plus, my 6% annual “value stock” EPS compounding during the first decade is more than double the S&P 500’s track record between 2006 and 2017 in the same realm.  This “reach” is obviously not well supported by history.  My only weak intellectual excuses are as follows: a) “negative news” or “event-driven” value stocks (probably the majority of value stocks in a vastly over-valued US stock market) will often exit under-performing business(es), which will tend to raise company-wide EPS growth rates for a time; and b), my the value stock NPV calculation is compared against a growth stock NPV calculation in which the growth stock EPS CAGR remains at an absolute nominal GDP growth trouncing high-to-mid-double-digits rate for two decades.  A hugely imperfect and arguably flawed effort at an individual security level, but perhaps at least broadly indicative of the upcoming divergence between value and growth stock price compressions in an overdue bond bear market.  Both types of shares will get clocked, but value stocks, as a group, will wilt (price-wise) less than growth stocks.  I’ve tabulated a 38% hit vs. 48% hit, as you know.  Still ugly, but considerably less so, which is precisely the point we’re trying to make.  To get back to a “100 purchase price,” that value stock price would need to rise by 61%, while the growth stock price would have to nearly double (up 92%).

Some thoughts for those that “can’t wait to buy US stocks” prior to history repeating itself.

And while we’re on the topic of history repeating itself, we’d be remiss if we didn’t mention how incredibly ridiculous and dangerous today’s intimidating, potentially career-shredding, at times financially-ruinous PC world is for those that dare to make a stand against a popular, whipped-up narrative — fair discovery, full transparency, timely charges rendered, evidence, witnesses, and facts be damned.  A world in which all too often “guilt” is assumed, rather than innocence.  Innocence is THE key assumption/bedrock principle underpinning due process rights, the west’s legal system, and a fair, humane governmental system.  Spreading political correctness is nothing other than suppression of free speech, and thus freedom.  Thought tyranny leads, inevitably, to brass-knuckle tyranny.  That is, history repeats. 

For disturbing “Borking” flavor on precisely the above topic, consider the absolutely contemptible effort by the deeply corrupt, purely politically-driven left to keep Judge Kavanaugh from becoming SCOTUS Justice Kavanaugh.  If a “last minute” effort to derail the confirmation of a highly qualified candidate with a multi-decade track record of constitutional fidelity when rendering decisions (what judges are supposed to do, i.e., endeavor to faithfully interpret the Constitution) is successful, then we are in even deeper political trouble than is already the case.  This is all the more true if an utterly isolated abuse charge, dating back 36 years (purported unwanted sexual advances by then teenager Kavanaugh) by a woman that can barely remember any of the “shirt-groping” details and only recently came forward with this claim, ends up shutting down Kavanaugh’s confirmation/nomination.  Insanity would rule, and a very high profile political lynching by “the mob” would set a very dangerous precedent.  

With $21trn in unaccounted for US government spending pointing to $21trn in unaccounted for money, widespread lawlessness at the highest echelons of power, an ongoing coup attempt to remove a duly-elected president from office or to totally incapacitate him, and an increasingly encompassing effort to institute de facto one-party government (by the allegedly “out of power” Democrats as enabled all too often by statist RINOs) as currently on display with the Kavanaugh confirmation circus, confidence is not being furthered and trust is not being (re)instilled.  All said, such goings-on further threaten a return to a reinvigorated rule of law, which is in deep, deep trouble (throughout the west).  And, for the same political reasons, our bubble valuations, which are already disconnected from financial and economic sanity, are also in deep trouble.  Investors assume stout rule of law protections, including in the all-important property right arena, which have long been under attack by the courts and the bureaucracy, both domestically as well as in other OECD nations.  At some point, all of the sudden, trust will wilt, and asset prices will “catch up” with political, financial, and economic reality.  Perhaps Trump’s recent, yet  overdue declassification of key FISA documents will prove to be the catalyst that pulverizes confidence by disclosing the unparalleled bureaucratic (deep state) lawlessness that has been taking place.  Caveat: only if the declassification is actually released for public review.  

Which begs the question: how can one value assets in a de facto banana republic (from a host of perspectivesincluding numerous, top-tier, un-indicted felons on, or previously on, the taxpayer payroll that are still at large*), versus in a rule of law republic, other than with extreme caution, i.e., via high bond yields and low P/Es, the antithesis of today’s US asset valuation bubbles?  How long will the bond vigilantes, the “algos,” and the so-called market technicians remain asleep at the switch; will the spreading contagion or an expanding trade war be the trigger that flips it?  Or, will we have to await a US equity market swoon before the Fed’s QT morphs into unprecedented QEThis is the $64,000 question, especially with the Fed’s QT in nearly “full-blown,” $50bn p.m. asset sale mode amidst huge and growing debt, rising deficits, and crumbling EM market currencies, bonds, and stocks.  (And crumbling EM economies are no longer able to hitch a ride on the erstwhile speeding “China growth train,” as that nation’s economic locomotive role has run into a $34trn wall of debt, a tally that has led to a 266% Chinese debt to Chinese GDP ratio as of the close of 2017, up explosively from 162% in 2008.)   

How long until the US stock market succumbs to political, financial, and economic “valuation reality 101” and to an increasingly dicey global economy?   And will the US stock market again lead the US bond market into a full-blown bust, just as it did in the ’70s (figure 8)?


Dan Kurz, CFA

* – For absolutely outrageous “over-the-top” flavor, consider Hillary Clinton.  The felonious former secretary of state destroyed massive amounts of evidence while gravely violating classified information security protocols with her private servers, and thus gravely threatened national security.  Yet, she was effectively exonerated by former FBI head Comey, who had the temerity to a) usurp judicial power and b), at the 14-minute mark of his self-righteous July 5th, 2016 tirade on this matter, warn that “everyday” Americans, in contrast, would be held accountable: “this is not to suggest that in similar circumstances, a person who engaged in this activity would face no consequences!”  (When there are two sets of laws, one for the mighty who stand above the law, another for the rest of us who have to abide by the law, a society by definition cannot have the rule of law.)


This commentary is not intended as investment advice or as an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion of the author at the time of writing.  Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not a complete summary or statement of all available data necessary for making an investment decision.  Liquid securities can fall in value.





Post #44: America in Q4, QT, crashing foreign markets & currencies, and the ever-closer “reset”

DK Analytics, Post #44: America in Q4, QT, crashing foreign markets & currencies, and the ever-closer “reset”  8/26/2018

Trade weighted US$: 91.03;  US 10-yr: 2.83%;  S&P 500: 2,862;  Oil: $68.72  Gold: $1,213;  Silver: $14.90




It’s getting choppier:

When asked where America is headed in Q4 as a topic of discussion for a rapidly upcoming interview, I wrote back that I am less sure where America is headed in Q4 than “down the road” in general.   The whole thing (political, financial, economic) could fall apart at any time.  On Monday, August 27th, 2018.  In a week.  In a month.  In a year.  In a year and a half.  I just don’t know, for “markets can stay irrational longer than investors can remain solvent” (Keynes said some smart stuff like that, and even he didn’t subscribe to governments’ forever rising tides of red ink, but rather applauded generating deficits only during recessions that would then turn into surpluses during recoveries, but I digress).

That said, and as per my latest post on QT, I believe the Fed’s monetary tightening will greatly hasten the “reset day.”  The Fed’s sustained tightening is already causing numerous EM currencies, stocks, and bonds — trillions of which (out of $58.5trn in aggregate) are denominated in dollars, with $500bn coming due in 2019 alone — to implode.  Meanwhile and concomitantly, the Fed is increasingly choking off growth in a debt-addicted US and global economy while raising EM’s financing costs in currency and interest expense terms.  This is especially true as we haven’t addressed what I call a toxic public policy stew.  Translation: as unelected bureaucrats, statist politicians, judicial despots, and crony capitalists remain busy killing the free market patient (esp. in the west and in India), private sector wealth creation, productivity, and good jobs, everything runs on access to (yet more) credit.  Take that away or make it more expensive without removing free market capital’s growing “global corset,” and that overdue recession won’t be overdue much longer (and neither will a stock market drubbing reaching US shores).

A “run-of-the-mill” recession would be a celebratory benign outcome on the heels of decades of political, financial, and economic malfeasance by an ever more entrenched global “ruling class.”  Call them oligarchs, plutocrats, fascists, lawless tyrants, or even central bankers. In any event, serfdom suits them all just fine, and they are well on the road to ruin (for the “99%”).  Now, of course such “deplorable” topics weren’t discussed at the annual Jackson Hole central bank love-fest a few days back, nor will they be discussed in the Alps of Switzerland in the coming winter (otherwise known as Davos).

Carping aside, back to getting a bead on what’s going on/going down.  We all know how intertwined today’s global capital and currency markets are — more than ever before thanks to globally coordinated and orchestrated “financialization.”  For flavor and for a preview of coming attractions (“Deutsche Bank” and bankrupt governments), you may recall how in 2008 UBS, the “unassailable” Swiss financial titan, was nearly brought to its knees due to huge exposure to imploding US mortgage asset valuations, including $26.6bn in investment-grade “junk.”   If it hadn’t been for a swift taxpayer bailout, massive fund withdrawals by UBS’s creditors and depositors would have rendered the bank both illiquid and insolvent.  My point: how does one spell CONTAGION, revisited?  And let us not even get bogged down in the quadrillions of dollars in derivative exposure risks by leading financial institutions, the largest chunk of which are bets that global money center banks made on interest rates staying abnormally low, despite unprecedented monetary inflation risks and/or insolvency risks (Venezuelan-style monetary debasement is just another form of insolvency or complete loss of creditors’ purchasing power).  As such, if interest rates “rise from the dead,” many banks will be dead, and those parties that would have enjoyed huge profits from rising interest rates, won’t.  A global financial meltdown, perhaps triggered by banks’ material exposure to rising interest rates or to escalating non-performing EM loans, wouldn’t be out of the question.


That Fed QT will morph into record Fed QE (debt monetization) amidst reversion beyond the mean:

A metastasizing contagion suggests a fairly quick and record reversion to QE by the “terrifically exposed” Fed and a return to fed funds rate cuts is just out of sight (when push comes to shove, the Fed will protect its owners’ balance sheets; those balance sheets belong to the big money center banks).   When this manifests, I believe it will be the wake up call that finally makes investors smell the “traditional asset and RE bubble valuation coffee.”  And once the algos go in reverse — feed on themselves in a falling market by triggering yet more sell orders — we will finally have that big, fat, overdue, and ugly reset: every asset gets repriced down relative to gold (and, by extension, silver).

Recall that markets are “reversion beyond the mean machines.”    In this case, from boom valuations to bust valuations. Upshot: we should once again see single-digit P/Es and double-digit bond yields — and nasty inflation/stagflation, as a crack-up boom finally ensues on the back of some $16trn in global central balance sheet expansion over the past decade that starts to find its way into the “real economy” with a vengeance (recall that central bankers have been desperately trying to stoke more inflation, and that once inflation starts, it typically gets out of control).  Arguably, we’ve never had so far to fall, globally speaking, because we’ve never had each major currency utterly divorced from any kind of defensible precious metals backing and discipline (although this could be on the verge of changing in both Russia and China with precarious implications for the greenback, especially if Germany wants a viable global reserve currency alternative to the buck), which has gotten us into all sorts of political, financial (debt), and economic trouble.  Not a good time to have asset valuation acrophobia.

We are so close to numerous remaining bubble asset valuation implosions, and President Trump’s trade antics and/or heightened political instability in the US and in EM, from South Africa to Turkey to Iran to Venezuela, threaten to make the global reset “closer still.”  Why?  Because increasing political uncertainty and tariff wars willkill” already globally weak economies facing the headwind of rising debt-induced interest expense growth prior to any interest rate normalization, much less “overshoot.”   After a 37-year bond bull market, one can almost hear the rumbling, even at the dollar-based center of global finance.

In the interim, the rule of law is virtually dead in the US and the West, and the un-elected, statist bureaucratic chieftains, with their powerful, protected jobs and their well-paid, ever-growing staffs (over 2m civilian bureaucrats in the US alone), have successfully usurped legislative prerogatives from elected officials — specifically, from the Congress in the US and from parliaments in Europe.  This, coupled with legislating from the bench, has not only effectively ended representative government in many OECD nations, but it has eviscerated working citizens’ property right protections, free market capitalism, productivity, and numerous nations’ balance sheets: at nearly $250trn in operations-based debt, the globe’s $81trn economy is too encumbered for anything but a destructive debt-based deflation.  That deflation will be fought tooth and nail with the printing press for political reasons until fiat money and its purchasing power are totally destroyed, as has always happened.

Simultaneously and sadly, unless reversed in time, many western nations’ sovereignty, cultures, codified individual freedoms, and tolerance will also be balkanized away.  Needless to say, budding resistance to this destructive status quo is resulting in growing political divides, which in turn is fueling rising tensions and potentially destabilizing political situations from Italy to the UK to the United States.  If this continues to ratchet up, as “populists”/workers increasingly clash with leftists/globalists, this could yield political paralyses, constitutional crises, and/or, in a worst case scenario, anarchy or war.  Needless to say, all of them would pressure stock, bond, and real estate valuations, including in “safe haven” America.

Speaking of America, the buck and the US stock market, which have been rallying as many ROW currencies and equity markets come under substantial pressure, are arguably the biggest, most unsustainable, and most foreign capital and import dependent bubbles of all (and of all time).  Ultimately, the US, the world’s largest net debtor nation ever (nearly $8trn) — a nation long lacking robust domestic savings that may well be looking for between $2trn – $3trn in new net financing p.a. given its current trajectory, which a stouter recession would widen substantially — cannot possibly have a sustainably strong currency.  Said is all the more true if that nation’s central bank appears bent on driving an economy still caught in a Fed-enabled bureaucratic and litigation (red tape) straight jacket, and way overdue to enter an “official recession,”  right off the cliff.

They say that all politics is local.  And that everything is political.  Well, when the Keynesian-overkill dolts or the central planners/monetary despots (pick your poison) running the Fed figure out that their owners are not going to be happy nor as rich on the heels of America’s stock bubble getting pricked (been there, done that in ’08, and this time around taxpayer-funded, TARP-style bankster bailouts are allegedly off the table), they will quickly resort to the only tools in their fiat currency toolkit: revisiting QE and a rapid trip back to ZIRP from a still pathetically low fed funds rate.  And, by the way, that 1.9% effective rate amounts to a negative real rate.  This is true either using fake government inflation stats pointing to 2.9% inflation currently, or if looking at a more credible estimate of inflation running between 6% – 8%.

The Fed’s (and other leading central banks’) doubling down on financial repression anew will prove what a big, fat, and ugly failure their policy of financial cocaine has been.  Economic (productivity) devastation.  A dwindling middle class.  Ever greater, increasingly unheard of, and (often) cronyism-induced wealth concentration.  Yet, most ironically, even more QE will be required given that the economy is drowning in the very debt that the central bankers have enabled.  Plus, politicians can’t go cold turkey without getting fired at the ballot box (let’s not forget increasingly imperiled pension plans) and central banks will protect, well, banks.   And that last man standing, the USD?  It will be naked.  Not such a pleasant sight, especially when considering dollar-based assets.

At such a juncture, which we view as imminent, even the most clueless deniers will have to realize that we are now irreversibly and increasingly quickly on the path to complete global fiat currency destruction — and that all assets deriving their value from being tethered to unbacked currencies will be “collateral damage.”  Most stocks, but especially bonds given “repayment impossibilities,” are going to get killed.  Global printing press-led currency devaluation contests will sprout once the 800-lb Fed re-enters official currency debasement.  A budding trade war would only add fuel to the fire.


What to do as the reset can be seen on the horizon:

Silver and gold (real money for thousands of years), and other vital real assets, starting with the dense energy and ag complexes, will be good places to seek huge purchasing power gains as well as purchasing power protection.  Reasons: precious metals are money and dense energy and ag assets are increasingly scarce/can’t be printed, and they remain vital both to leveraged output and sustaining 7.2bn people’s lives.

Meanwhile, select short-term government bonds, such as US T-Bills, will be good places to hide pending emergence of true bond, stock, and real estate bargains.  The reason: governments can print the money to repay these bonds.  Plus, short-term government bonds avoid both interest rate risks and bank bail-in risks.  There is bail-in legislation in place throughout the OECD world that will have your bank deposits converted into bank equity of very questionable value if necessity dictates, which could happen as taxpayer bailouts are, well, out.  You didn’t intend to buy bank shares with option-like valuations with your money, did you?

Speaking of which, avoid bank illiquidity risks.  And remember something about that bank account of yours: your deposited funds represent unsecured (junior) creditor claims!  With banks typically investing over 95% of depositor funds and depositors typically representing well over 50% of bank financing, you want to limit your exposure here, FDIC insurance protection notwithstanding.  Reason: the FDIC’s funds would cover only 2% of insured deposits.  Moreover, deposits at risk can’t be money, right, because money is supposed to be both without risk and without yield?!  While your bank accounts or money market accounts are virtually without yield (and devoid of a real yield), they certainly aren’t without risk, so why not shift excess (beyond working capital needs) funds into short-term (two or three month) government bonds?

In closing, let me now revert to the opening question, namely where is America heading in Q4?  Once again, I don’t know where America will be in Q4.  As regards a reset (in dollar and all fiat currency terms, massively lower bond, stock, and real estate values juxtaposed against substantially higher precious metals prices and, over time, materially higher scarce vital asset prices), it could be earlier or later.  That said, I would state that America’s currency and America’s bond and stock markets will be heading where much of the world has been heading, especially the EM, because the whole world is basically in the same leaky political, financial, and economic boat. It would not surprise me if a US-based reset started to develop prior to year’s (2018’s) end. Once it starts, a rout will be difficult to stem. By contrast, it would surprise me greatly in today’s globally intertwined financial and economic world if the wheels didn’t come off the current American valuation bus by next year, especially given mounting confidence (political) and economic challenges, very much including an overdue recession.

We live in “exciting times” full of risks and opportunities of a possibly once-in-a-lifetime nature.  That quiet before the storm, that “big fat eye of the hurricane” that I mentioned in March numerous times via various publications, could be departing.  Consider reallocating.  Afterwards, brace for up to 156 mph/251 km/h wind speed, or a category 5 financial storm.  And then back up the truck.  But don’t rush.  Ultimately, unbelievable bargains will be available that most won’t consider in bonds, in stocks (and entire businesses), and in real estate.  Reminds me of precious metals today.


Dan Kurz, CFA

This commentary is not intended as investment advice or as an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion of the author at the time of writing.  Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not a complete summary or statement of all available data necessary for making an investment decision.  Liquid securities can fall in value.