“In U.S. markets, overall financial vulnerabilities were judged to remain moderate, as nonfinancial debt had continued to increase roughly in line with nominal GDP and valuation pressures were not widespread. However, during the discussion, several participants commented on a few developments, including potential overvaluation in the market for CRE, the elevated level of equity values relative to expected earnings, and the incentives for investors to reach for yield in an environment of continued low interest rates.”
My response: Gee, ya think? Look at the chart below of a benchmark nationwide index that tracks commercial real estate prices:
You don’t need a Ph.D. in economics to see how out of control things have gotten. I did the math, folks. That’s a 95% surge in real estate values from the most recent trough through present day. In the epic 2001-2007 bubble … one that everyone pretty much agrees was the biggest real estate bubble in U.S. history … prices “only” rose 81%.
The sad part is, the Fed (as always) is way, way too late in noticing and talking about this problem. And the really scary part is that the rest of the Fed minutes make it clear that policymakers aren’t going to do anything to fix it! That guarantees this bubble will blow up in all of our faces, just like the housing and dot-com bubbles before it.
Of course, out-of-control real estate speculation is just one of many distortions caused by the policies enacted in the past several years. The Wall Street Journal reported today that investors are so demanding of dividends in today’s yield-starved world, that companies are dishing them out like Halloween candy – even when they don’t have the earnings to pay for them!
Specifically, S&P 500 companies are paying out the largest dividends (relative to profits) since the Great Recession – 38% of net income. Some 44 of the companies in the index paid out more in annual dividends than they managed to earn in the previous year.
|Dividends are a great way to reward shareholders … if you actually have the money to pay for them.|
Look, dividends are a great way to reward your shareholders. But that’s only true if you actually have the money to pay for them … and if you’re also investing enough money in capital equipment, factories, and R&D.
The latest business investment figures show that just isn’t the case though. Private fixed investment dropped at a 3.2% rate in the second quarter, the worst decline in seven years.
I could go on and on citing examples. But I think you get the picture. This is a gigantic “Everything Bubble” – and the sooner this madness ends, the better off we all will be in the long term, even as the shorter-term pain will be enormous.
What am I doing to help you survive what’s coming? Everything I can.
First, I’ve been issuing some of the direst warnings I have since just before the housing bubble began to pop 11 years ago. That includes my article this week on trouble in hidden corners of the credit market, and my early August piece on tightening lending standards in the banking business.
Second, I’ve been crisscrossing the country (and hitting the high seas!) this year to discuss these looming issues with investors like you, and to make sure you know how to protect and grow your wealth.
I’m traveling to The MoneyShow Toronto next month, for instance, and I’d love for you to join me for my presentations and panel discussions there. It’s scheduled for September 16-17 at the Metro Toronto Convention Centre, and you can register online by clicking here. Or just call 800-970-4355 and mention priority code “041484.”
Looking for something closer to home? Then consider the New Orleans Investment Conference. This blockbuster show is one of the longest-running, most important gatherings focused on metals, mining shares, and the broad markets.
It runs from October 26-29, and I would like nothing more than to see you there. Best of all, you won’t just get the chance to hear from me. The show also features some of the greatest minds in the investment world, including James Grant, Marc Faber, Charles Krauthammer, Peter Schiff, Stephen Moore, Brien Lundin, and more.
I can’t stress enough how perfect the timing is for this conference, given the incredible opportunities opening up in the metals markets – and the wild volatility we’re seeing in the markets overall. So if you have an opening on your calendar, and would like to learn more about the New Orleans Investment Conference, just click here. Or give our staff a buzz at 800-648-8411 for more details, and mention that you’re calling on my invitation.
Bottom line: This isn’t the time to be complacent, to sit on your hands, and to ignore the rising risks behind the scenes. It’s the time to educate yourself about all the ways you can survive – and thrive – in the coming turmoil.
Until next time,
Is there ever a time to buy negative-yielding bonds, or are they the worst investment in history? Is the stock market rampage going to continue, or is a comeuppance right around the corner? Those were just a couple of the important issues you’ve been discussing at the website.
Reader Chuck B. said the following with regarda to bonds that pay nothing: “An investor is a fool if he/she buys bonds that pay hardly any interest, or even cost money to hold (negative interest). A bond is a bit like an auto, which loses value when you drive it out the door. If you need to sell it before maturity, it sells for less than face value. But at least it should pay interest while you hold it, and be redeemed for face value at maturity.
“If it doesn’t pay a reasonable interest rate, greater than the rate of inflation, it is not worth buying, and should have no market. Government bonds may have some element of safety. But if they cost you money to hold them, they are not worth buying.”
On the overall market outlook, Reader Nels said: “The one huge advantage that individual investors have over institutional investors is that we don’t have to be in the financial markets. When there are no good investments, we don’t have to invest.
“The old rule of successful investing is to buy low and sell high. New market highs are no time to establish new positions. When everything is high, it’s time to start averaging out of your investments, and try to sell everything before the top. Eventually, if the bubble goes on long enough, you will wind up 100% in cash.”
On the other hand, Reader Ragnar1 said it’s tough to identify a catalyst that might cause a major stock market decline: “What will be the trigger for the ‘run for the hills’? Everyone will decide one morning to do so? The market is quiet now.”
But Reader Joe S. offered these words of caution, based on his decades of experience as an investor: “I have been investing in the market for 50+ years. I have never seen the world financial picture as convoluted as it is today. I think most people will agree that the 2008 meltdown was a large part of what is happening today. Overall, Bernanke did a good job to keep the financial world from a complete collapse.
“However, the stimulus package never went to Main Street. Then zero interest rates for the past eight years. Nobody on Main Street was making any headway to invigorate the economy. But now, the market is at an all-time high, riding the wave of cheap money.
“There’s a big storm brewing – but no one knows when it will blow the house down. All you can do is sit on your nest egg and wait for better times. Good luck.”
Thanks for those insights. I believe the markets are all coiling up for some potentially large moves, moves that could cause total chaos in stocks, bonds, currencies, and more. The timing is tricky, of course. But given where we are in the economic cycle, I do NOT think now is a good time to take on inordinate amounts of risk in all of our portfolios.
I’d love to hear what else you have to say on these topics over the weekend. So please hit up the comment section when you have a moment.
Companies that operate correctional institutions on behalf of state and federal governments got crushed yesterday after the Federal Bureau of Prisons said it would shift back to government-operated facilities over time. It decided to take the step after determining that private facilities didn’t save enough in cost or provide the level of service required. Corrections Corp. of America (CXW) and GEO Group (GEO) plunged as much as 40% on the ruling, even though it only impacts federal institutions (rather than state prisons).
Interest rates are soaring, the currency is plunging, and investors are running for the hills … in Mongolia! The nation is in financial crisis because its currency reserves have dried up, debts racked up in good times are crushing its financing, and its resource-oriented economy suffers due to the slowdown in neighboring China. Some kind of International Monetary Fund bailout or debt default seems likely.
That whole mugging thing, where four U.S. swimmers were allegedly held up at gunpoint by rogue Brazilian criminals posing as police officers? Turns out it may have been a made up and/or embellished story, at least according to Brazilian officials.
They say Ryan Lochte and the other three swimmers actually showed up drunk at a gas station, vandalized a bathroom, and otherwise embarrassed themselves. Who knows where the truth lies, but clearly the back-and-forth has put a bit of a cloud over the Rio Olympics.
What do you think of the push by government to re-take control of correctional institutions? How about Mongolia joining the long list of emerging market nations in crisis? Will the swimming shenanigans prove to be just a footnote, or tarnish the world’s view of the Rio Olympics? Let me know what you’re thinking on these or other topics in the comment section.
Until next time,