The memories help put a smile on my face. And they also got me thinking about one of the most important traits I hope I’ve managed to pass down as a parent: Common sense.
I know my kids will make mistakes. That’s part of the learning process, after all. But provided they appreciate that a little common sense goes a long way, I’m confident they’ll turn out just fine. I’m not so confident the same is true for many central bankers, lenders and policymakers.
Just think of what I wrote yesterday about auto-loan delinquencies. They’re soaring to six-year highs. Why? Because lenders made too many exceedingly reckless loans to too many subprime borrowers on incredibly generous terms.
Common sense should have told the industry to back off — just like it should have near the peak of the housing bubble. But it didn’t, and now the losses are starting to mount on these loans, just like they did on mortgages a decade ago.
|Countries around the globe have been attempting to drive their currencies lower in value in an effort to gain an advantage.|
Or how about the current obsession about negative interest rates among central bankers? Let’s say you own a bank and you can only cut the rates you pay to depositors to 0%. But because central banks are going nuts slashing rates into negative territory, the yields you can earn on bonds and loans keep collapsing toward 0%.
What’s going to happen? Your profit margins and your earnings are going to collapse. And what’s that going to do? It’s going to crush the value of your debt and equity securities, leading to the investment market equivalent of bank runs. It’s just common sense.
But somehow, all the Ivory Tower economists ensconced in central banks around the world didn’t anticipate this. They thought that crushing bank margins would somehow lead to more loans being made and more confidence in the banking system. Japanese citizens are so panicked by the Bank of Japan’s latest moves that there’s a run on safes to store cash!
Here’s another one for you: Countries around the world keep trying to drive their currencies lower in value in an attempt to gain an advantage when it comes to trade and economic growth. That’s been the unspoken (or in some cases, explicit) strategy of the Bank of Japan, Swiss National Bank, European Central Bank, Reserve Bank of Australia and others.
|“If everyone else is trying to depreciate their currencies at the same time, it won’t work.”|
But common sense should tell you if everyone else is trying to depreciate their currencies at the same time, it won’t work. They can’t all depreciate against each other without their efforts canceling out.
I’m not saying I get all my predictions right. Far from it. But I do know that common sense suggests many policymakers have lost their marbles. Their forecasts and their strategies are woefully off target. Yet they keep trying the same thing over and over again – and they can’t seem to figure out why it’s not working.
That’s eroding investor confidence severely. It’s also causing smart investors to increasingly “fight back” — by selling what policymakers want them to buy, and buying what policymakers want them to sell. Just look at how well gold, inverse stock ETFs, the Japanese yen, and other “risk off/lost confidence” investments are performing.
My advice? Allocate a portion of your funds to these pro-common sense investments. That strategy has paid off nicely for my subscribers in the last several months, and until policymakers get a grip or a clue, it should continue to do so.
What do you think? Are investments like the yen, inverse stock ETFs, and gold great “common sense” insurance? Or have they come too far, too fast? Do you think policymakers are on the right track? Or are they proceeding down a dangerous path that leads to lower stock prices? Are there other policies they should pursue, in your opinion? Let me know what your thoughts are on these matters below.
Will the upcoming G-20 meeting be nothing more than a dog-and-pony show? Or a gathering where policymakers actually accomplish something? Several of you weighed in on that debate.
Reader Al could hardly contain his skepticism, saying: “There will be a great deal of glad-handing and little progress vis-a-vis the G-20. The EU is in shambles, Japan is a lost national economy, and the Chinese cannot be trusted in any way and will probably be grandstanding in their customary fashion.
“The USA would be better off meeting with Canada and Mexico to establish real economic policy in North America. After all, the NAFTA agreement could easily be expanded, providing a truly unified economic benefit. As an individual investor, blue-chip, large-market-cap companies offer somewhat of a best position and cash is king.”
Reader Henry A. added: “I don’t see how the G-20 could be expected to accomplish anything significant. In fact, I think that there are forces in motion that have taken the fix out of their hands — a huge amount of unproductive debt worldwide that can’t lead to anything but turmoil and default.”
Reader Howard picked up on the idea that investors are losing faith in grand political solutions: “It seems to me that we are moving away from free markets and moving toward managed risk by central banks. Free-marketers are losing trust because of changing monetary policy, and that may account for the larger cash holdings by individuals and trust funds, etc.”
Reader Tillamook T. said: “The chickens are finally coming home to roost. The debt has been piling up for years and one day it must be paid back. They will do almost anything to keep this golden calf alive, but it’s now sick and getting sicker. The day of financial reckoning is soon to come.”
Lastly, Reader Jim B. offered this simple but powerful message: “We can’t ask everybody else to get their financial houses in order until we get our financial house in order. We will have no power to cause change in the global markets until we set the example.”
Great points all around, and I appreciate you sharing them. There’s a very good chance that policymakers serve up a plate full of “Nothing Burgers.” U.S. Treasury Secretary Jacob Lew himself seemed to suggest that was coming in an interview with Bloomberg today.
The problem: With several key markets trading at very important technical levels, that could lead to significant breakouts (in things like the Japanese yen and Treasury bonds) and significant breakdowns in risky assets (like stocks and junk bonds). We will find out soon enough.
If you have anything else to add on this topic, make sure you hit up the discussion section below and share those comments.
Saudi Arabia poured cold water on the idea of future production cuts, saying they are “not going to happen.” Iran also called the recent OPEC/non-OPEC deal to freeze production at current record levels “ridiculous.” So much for the happy talk about a “Kumbaya” moment in the oil market!
Donald Trump scored another victory in Nevada, taking the win by a wide margin of around 22 percentage points. Marco Rubio came in second place. But if Trump has a strong showing in next week’s Super Tuesday primaries, the Republican nomination will essentially be locked down.
The British pound continued to plummet overnight, dropping to less than $1.39 against the dollar, amid fears of a “Brexit” from the European Union. Many economists believe it could fall below $1.35 over time – which would put the pound at its weakest level since 1985.
The war of words over the South China Sea is heating up, with the U.S. accusing China of sending fighter jets to an island in the Paracel Island chain. China also appears to be building radar facilities in the region, and basing surface-to-air missiles there, as part of its push to legitimize and back up its territorial claims.
Is the oil deal dead now, and prices headed toward $20 again? Is the British pound destined to slump to Reagan-era lows? What do you think about Trump’s political momentum, or the war of words between the U.S. and China over territorial claims off the coast of Southeast Asia? Please share your thoughts below.
Until next time,
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