Mike’s Moves to Make
Buy: Defense stocks, food and beverage stocks, infrastructure stocks (on pullbacks), very short-term fixed income ETFs or funds
Sell: REITs, housing and mortgage stocks, home improvement retailers, long-term bonds and bond funds, emerging markets, oil
Remember my warnings about “Bloody Wednesday?” I invented the term to describe the chaos that Federal Reserve interest rate hikes would unleash on the markets (since Fed meetings conclude on Wednesdays).
Boy, did my forecast ever pan out last year! Within a few short weeks of the December 16, 2015 rate rise, volatility exploded, gold surged, and the Dow Industrials plunged by more than 2,000 points.
In part because of that turmoil, though, the Fed went into “chicken out” mode. Instead of delivering a few more rate hikes in 2016 – as the Fed itself forecast it would – policymakers kept inventing excuses not to.
But the jig is now up. The Trump-Quake unleashed by last week’s election all but guarantees the Fed will have to hike again at its meeting on December 13-14. It also radically boosts the chance of multiple Bloody Wednesdays in 2017.
Crazy? Not at all – and I’ll tell you why. The Trump administration is talking about unleashing massive debt-funded, tax-and-spending programs the likes of which our country hasn’t seen in decades. Up to $1 trillion in infrastructure spending (partially funded through public-private partnerships), large corporate and consumer tax cuts, regulation cuts, and more are coming down the pike.
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That should boost economic growth in Trump-sensitive sectors, at least in the shorter term. But it will come at the cost of higher inflation, higher deficits, and higher debt. Estimates of the potential impacts are all over the map because no one knows exactly what Trump will propose or knows how much of his agenda will pass Congressional scrutiny.
But one non-partisan group, called the Committee for a Responsible Federal Budget, estimates Trump’s programs will boost Uncle Sam’s debt load by $5.3 trillion over the next decade. As a percentage of GDP, our debt would jump to 105% from 77%.
A separate non-partisan group called the Tax Policy Center estimates Trump’s tax plans alone will boost our debt load by $7.2 trillion over ten years. One analyst, Mark Zandi at Moody’s Analytics, said our deficit could balloon to 10% of GDP from around 3.5% now. The corresponding surge in growth and inflation could force the Fed to jack interest rates up to a whopping 6% by 2018 from just 0.25% to 0.5% now.
|Higher short-term interest rates are coming from the Fed.|
Again, the precise details remain to be sorted out. But the trend is clear: Higher short-term interest rates are coming from the Fed. And the more fiscal stimulus we get, the more aggressive the Fed will have to be, something Boston Fed President Eric Rosengren just warned about in a speech this week. That could lead to some wild market moves, and more “Bloody Wednesdays,” in the months ahead.
Of course, the Fed only controls short-term rates directly. Bond market investors drive longer-term rates with their buying and selling decisions, and they’ve been selling like mad since the election. That has made the last several days one of the bloodiest on record for anyone who didn’t follow my advice and stay the heck away from long-term bonds!
Some figures to ponder:
- Globally, bonds have already lost more than $1.2 trillion in value over the span of only a few days. That makes this one of the worst bond market crashes in the last 20 years.
- Treasury bond futures alone have plunged more than 25 points in price since July. That’s the worst wipe out since the 2013 Taper Tantrum. Ten-year note yields have surged almost a full percentage point to 2.28%.
- The 2-year Treasury also briefly topped 1% for the first time since December 28, 2015, while 30-year mortgage rates surged by half a percentage point to the highest since January.
So what does this mean for your investments? What strategies will help build and protect your wealth in an era of Bloody Wednesdays?
First, keep avoiding long-term bonds. Treasuries. Munis. Emerging market bonds. Mortgage bonds. It doesn’t matter. Individual bonds, as well as bond mutual funds and bond ETFs that hold longer-term debt, are already getting hammered. That pain is only going to get worse over time.
Go through the list of every fund you own and check their average maturity and/or average duration figures. All fund companies provide this information. If the numbers are greater than two or three years, you’re in trouble. Rising interest rates will pummel the value of your funds.
Second, get the heck out of things like Real Estate Investment Trusts (REITs). Not only are they interest-rate sensitive, meaning they lose value in a rising rate environment. But both REITs themselves and the underlying commercial real estate they own is wildly, massively overvalued thanks to the titanic “Everything Bubble” that central bankers inflated with their reckless policies over the past eight years.
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As the U.S. Fed is forced to raise rates, and long-term bond yields rise, that bubble is going to pop. It will do so at the same time lending standards are tightening, delinquencies on property loans are climbing (a topic the Wall Street Journal covered this week here), and supply growth has been out of control in sub-sectors like multifamily. Talk about a recipe for disaster!
As for housing, the surge in home mortgage rates over the past week caused purchase and refinance application volume to plunge more than 9%. Further increases in rates will drive monthly payments for prospective buyers even higher, taking some of the air out of home sales and home price growth.
That’s bad news for housing and construction ETFs, as well as mortgage and housing-sensitive stocks.
Third, buy stocks that will benefit from a Trump-engendered spending binge and Trump administration policies. I gave a general overview of some of the favored stocks and sectors in last week’s Money and Markets column.
But I went much further in two critical Flash Alerts that I sent to my Safe Money Report subscribers in the past week. I “named names,” and provided specific recommendations, on investments poised to soar (or sink) in a Trump regime. Be sure to take action if you’re a subscriber, or get on board right away by clicking here if not.
Whatever you do, don’t just sit there and freeze up. With more Bloody Wednesdays headed our way, you have to get active, get prepared, and make adjustments like those I recommend in my Safe Money Report. That way, we’ll all make it through this new era in better shape together. And as always, be sure to share any comments on my columns in the discussion section below.
Until next time,