September 2019 Newsletter

Portfolio Strategy September 2019

By Vaughn Woods, CFP, MBA

With Great Britain and the European Union in flat to recessionary growth and for fear of spillover into the U.S. economy, the Federal Reserve is expected to announce still lower interest rates in September.

The 30-year Treasury bond is already yielding just 1.98% (a record low) and the 10-year bond yields just 1.47% as of this writing. Rates are much worse for savers and retirees in Europe. To illustrate, the 10-year German Bund sports a yield of -.70%. That’s a negative return after 10 years. In Japan the equivalent instrument yields -.28%. So, money is flooding into the U.S. bond market; the last place on the planet with a strong currency that provides a positive return on savings. If this seems perplexing, you’re not alone.

Some well-regarded economic analysts are now warning that the ability of the world’s central banks to use monetary policy to reverse an economic downturn is coming to an end. Apparently when borrowing rates are 8% and you drop them to 3% it stimulates consumer activity. However, when the world is flush with easy money and rates drop from 2% to 1% or lower people just hold their cash. After all, you can’t retire on 1% bank yields.  

The good news is that U.S. consumers appear healthy. So while recession talk is growing, here in the United States consumers are experiencing higher and higher disposable incomes from low gas prices, low unemployment, low mortgage rates, brisk mortgage refinancing activity (often with cash out) and low inflation.  And it’s not just consumers who are benefitting. To take advantage of this low-rate environment, Secretary of the Treasury, Steve Mnuchin, is considering the issuance of new debt instruments that mature in 50 year and 100 years. Doing so would lock in this world-wide low-interest-phenomenon; offering a windfall of benefits to American tax payers young and old. How and why?
Think of the current low-rate environment as a refinancing opportunity for the federal debt. To illustrate, how often have you heard people say, we can never pay off this growing federal debt. Well, if rates go much lower, then yes, we can.  Imagine the savings if interest on the U.S. debt instruments goes to zero or lower as it has in Japan and Germany. What would that look like?

Consider the following. At the start of interest payments on the federal debt was expected to cost Americans between $479 billion and $593 billion. That’s projected to account for almost 8.7% of all federal outlays in 2019. Now imagine the cost of financing the federal debt dropping be half…or lower.  The savings alone could fund massive infrastructure (economic stimulus that works) programs and support lower taxes. 

By comparison, in 1990 just the interest on the federal debt accounted for 15% of all federal outlays. Trade war? Who needs China?  Total export revenues to China in 2018 stood at 120 billion. Low cost interest on the federal debt could save Americans 250 billion or more…and that’s just the first full year of savings. So basically, the disposable income of American is going up due to the bond market. Will this realization cause the stock market to move considerably higher? Some analysts are talking about a melt-up stocks once the central banks put an end to ineffective monetary policies.

In order to hedging against the downside risk that may come from the blow out of a bond bubble, we have added to gold, short-term bonds and money market holdings. Why?

  • The world’s investment community is struggling with a theme I will call “the end of globalism”
  • Fear is growing that the world’s central banks have flooded the markets with free cash and that the dollar is too strong, holding back world economic growth at a time when corporate spending is falling.
  • Internal conflicts between the rich capitalists and poor socialists may end the world order if a socialist government takes hold in the United States.
  • The bubble in bonds may be ending soon, creating financial uncertainty given the size of the bond market. Think of this as “quantitative failure”.
  • Theories are now gaining traction that, void of fiscal spending alternatives, (until after 2020) President Trump may revisit President Nixon’s 1971 strategy to reset the value of the dollar (lower its value) by establishing a new relationship between the dollar and gold. This would lower the value of the dollar.

Any strategy to lower the value of the dollar would crush the Chinese economy, create a in rally emerging market companies who can pay their debts back in cheaper dollars, cause the price of oil to spike (a U.S. export windfall), make U.S. products more competitive worldwide and, therefore, act as an alternative stimulus measure to fiscal spending-which is controlled by congress.   

It’s a complex economic world out there, given, and this is a partial list, Brazilian fires, insults between heads of state, structural issues such as Brexit, immigration push-backs within the European Union, tariffs, central bank inefficiencies, demographic inequalities among nations, crypto-currencies, Russians, the silk-road, crime, poverty, floods, Huawei, the totalitarian mercantile spy state, Iran, North Korea, AI, Venezuela, Russia, negative interest rates, government investigations, Facebook, Hong Kong, algorithms, antibiotics, inverted yield curves, trade wars, 30-year yields at record lows, the Queen & Boris Johnson, drones, the wall, antisemitism, Argentinian bonds, sub-prime credit deterioration, lead-acid Battery Recycling, opioids, Antifa, radiation, bearish sentiment, margin contractions, Siri, central bank errors, drought, Chinese currency flight, cannabis, digital security, currency wars, 737 Max, CNN, climate change, inflation, the lack of inflation, deflation, home-price slumps, taxes, labor shortages, underemployment, Robots, memory, confidence, 5-G, recession, beyond chicken, sharks, tardiness, health and fear.

So, thank you for your continued faith and trust in all we do for you daily,

Vaughn

Vaughn Woods, CFP, MBA

Vaughn Woods Financial Group, Inc.

2226 Avenida De La Playa, Suite A

La Jolla, CA 92037

858.454.6900

www.vaughnwoods.com    

https://www.thebalance.com/interest-on-the-national-debt-4119024

Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal.  Past performance is not a guarantee of future results.  Asset allocation cannot assure a profit nor protect against loss.  Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed.  Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management.  The information provided her is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  VW1/VWA0239.

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