US markets face a realignment with reality in the near term. Here are the major recent developments that may have spurred tech company Overstock.com to hold 3 months of food and $10 million of gold in reserve for employees in case of a financial emergency.
The dollar has enjoyed record inflows from crashing emerging markets, which have in turn obliterated multinational profit margins.
Big oil companies burned billions in cash during the third quarter.
Companies are spending and borrowing money to buy control rather than to invest in growth.
Mergers and takeovers are at a $1.2 trillion level in 2015, with an average transaction of $10 billion, in the biggest takeover boom since 2008.
Share buybacks are at an all-time high, supported by $58 billion in bond issuance. Yield-starved investors buy 30-year corporate bonds at rates seen on bank deposits just a few years ago.
Carl Icahn compared the current leveraged-buyout binge to companies “taking a drug” to benefit stock market metrics in the short term.
Apple reports the biggest annual profit in history — not just its history, but all of history.
Google’s third quarter profits are up 45% after reorganizing as Alphabet.
LinkedIn nearly doubled earnings estimates for the quarter.
While stock market observers cheer, they continue to assume the truth of the debunked “Fed model”.
Junk bonds have been the primary alternative to yield starvation for years.
The value of junk bonds is completely dependent on the perceived absence of consumer price inflation combined with the ability of bond issuers to maintain top-line revenue and gross profit margins, an increasingly shaky proposition. Junk bonds have now given up all their gains since the bull market began.
Investors continue to pour money into junk bonds, while companies exit junk status not via ratings upgrades, but via bankruptcy.
As of early 2015, oil and gas issuers made up double the proportion of the Moody’s junk bond index that they did in 2009.
IPOs are not reaching their target prices, and highly anticipated offerings are being delayed or withdrawn.
Negative interest rates have obliterated the “zero lower bound”.
The U.S. sold 3-month Treasury bills at zero interest. Investors are handing their money to the federal government and asking for nothing except that it be returned to them in the future.
$345 billion of Eurozone government debt yielding less than -0.3% has reached the market.
Italy, one of the PIIGS of European debt crisis fame, sold six-month debt at a negative yield. Investors, with the help of the European Central Bank’s “quantitative easing” bond-buying program, are paying the Italian government to take their money.
Sweden has imposed negative interest rates while it pursues the elimination of physical cash, the only escape hatch to avoid negative interest rates.
The Bank of England’s chief economist is calling for the same combination of cash bans and negative interest rates.
Governments, facing a loss of control over real exchange rates, are increasingly scrutinizing the use of gold coins as an alternative form of money.
Deutsche Bank lost $6.6 billion and will cut 35,000 jobs.
Credit Suisse is cutting thousands of jobs and asking investors for $6 billion.
Standard Chartered lost $139 million and is cutting 15,000 jobs and asking investors for $5.1 billion in response.
Chevron will burn cash until the end of 2016 and is cutting 6000-7000 jobs.
Caterpillar is laying off 10,000 workers.
Engine maker Cummins is cutting 2,000 jobs.
Manufacturer 3M is cutting 1,500 jobs after earnings missed expectations.
Insiders are exiting US property markets.
Sam Zell, who called the top of the property bubble in 2007 by selling $23 billion worth of office properties to Blackstone, just sold 23,000 apartment units to Starwood for $5.4 billion.
Commercial real estate prices are now 14.5% above their 2007 highs. Cap rates are at record lows, breaking the previous all time record low set in 2007.
Wages are on the rise.
UK wages are rising at the fastest rate since 2009.
US wages are trending upward.
Walmart has set a higher minimum wage for its staff and will spend an additional $1.2 billion doing so.
Consumer price inflation is the wild card. When it arrives, it will erode the real value of corporate earnings in addition to fixed-rate debt instruments.
Consumer price inflation will arrive as a result of rising wages making consumer borrowers more creditworthy, combined with the Fed reducing the 0.25% rate of interest on excess reserves that it has paid since 2008. As of yet, commercial banks can collect these payments as zero-risk corporate welfare in exchange for keeping $2.5 trillion in assets against which they could lend out of service.
Conclusion: Hedge like it’s 1999.
A combination of cash and equivalents, straddle tactics with inverse index ETFs and/or options, and crisis investing in markets that have already experienced severe capital outflows is a strategy likely to bear fruit going forward.
