In a recent interview with Chuck Butler, he warned us that we may be in for a significant “Minsky Moment”.
The federal reserve is raising interest rates and unloading trillions in their US debt holdings. Countries that normally buy our bonds are slowing down their purchases or reducing their holdings. With fewer buyers, what happens if interest rates continue to climb?
Chuck then sent me an article by David Stockman which concerns me; the issues we discussed are happening worldwide.
David Stockman presented an eye-popping graph. Debt being held by central banks has tripled in ten years to well over $20 trillion.
If world-wide central banks are working in unison unloading debt – the Minsky Moment could be much bigger than I originally imagined.
It’s time to get some input from someone outside the US who is involved in global finance on a daily basis. I contacted Rob Vrijhof, President and Senior Partner in Weber Hartmann Vrijhof & Partners Ltd. located in Zurich, Switzerland.
DENNIS: Rob, thanks for taking the time for our education. Several experts are warning about the world-wide, staggering government debt. Central banks have reversed course – some have stopped buying, while others are selling off some of their holdings.
What are you seeing in Europe, China, Japan and elsewhere?
ROB: Thanks for inviting me.
The debt that has been building up by the world national banks is indeed staggering.
After the real estate bubble burst in the USA, enormous amounts of money created out of thin air were being pushed into the system trying to avoid a complete collapse of world economies. It seems that national banks, working in tandem, saved us from a total downfall – with interest rates falling into negative territory in Europe.
Reality is now kicking in and these enormous accumulated debts will eventually have to be paid back. The big question is how this will be done. This question is faced not only by the USA but also by Europe and Japan to name just a few.
This presents a real challenge for central banks for the years ahead. Higher interest rates are poison – perhaps it could be done through inflation.
Unfortunately, we strongly believe there will be no happy end to this party of cheap money.
DENNIS: The law of supply and demand hasn’t been repealed. When supply of debt instruments (bonds) is higher than demand, interest rates will rise. Interest rates on US treasuries have already doubled since July 2016.
A two-part question. What are you seeing outside the US? Are the days of negative interest rates disappearing?
ROB: The interest rate hikes started in 2017 by Madame Yellen of the Fed. We believe new Fed chairman, Mr. Powell, will continue the process. We anticipate he will increase rates by 0.25% in March followed by another two hikes in 2018. While he says he will keep a close eye on inflation, we believe the 2% target will be shuttered – we may be in for a period of higher inflation.
The European Central Bank headed by Mr. Draghi is under no pressure to hike interest rates. We feel he will wait and we expect the first rise in interest rates in Europe during the fourth quarter of 2018.
The Swiss National Bank will do everything they can to keep their negative interest rates in place, inflation in Switzerland is still not on the horizon. We strongly believe that the negative interest rates will be with us for another 12 to 18 months. We don’t expect the Swiss National Bank to raise rates until well into 2019.
|
Advertisement Our friend Tim Plaehn at The Dividend Hunter has set up a unique Monthly Dividend Paycheck Calendar system that can provide you with an average of $4,000 a month in extra income based on a model portfolio of $500,000. For a limited time, he’s offering readers a 50% discount on the first year of a subscription: just $49. Disclosure: we get a small commission on sales that we use to keep Miller on the Money Free. CLICK HERE for more information. |
DENNIS: Rob, I’m concerned about the bond market. Central banks alone hold over $20 trillion in bonds that pay interest rates well below the market. What are you telling your clients who may be holding long-term bonds?
Wouldn’t inflation have to be considered?
ROB: We’ve been telling our clients to use any rally on long-term bonds as an opportunity to sell since we strongly believe this everlasting bull market in bonds could be coming to an ugly end.
We are always looking for short-term bonds that are paying higher interest rates than the ones in the USA. In foreign currencies, you profit from higher interest rates and also from the weaker US Dollar. High-quality foreign currency bonds are available and very liquid, so we view this as a solid alternative.
Yes, inflation is a big concern. We anticipate a revival of inflation with most of the world economies blasting ahead at full speed, wages and interest rates moving up.
We should all hope that it will not be galloping away since high inflation numbers could also be bringing the ugly “R” – word (recession) back into circulation.
DENNIS: I’ve wondered if I would ever see safe, high quality 6% bonds again in my lifetime. When we did our retirement projections, 6% was a given. Do you feel it’s possible to return to those days? At 6%, how could debtor nations possibly afford to pay the interest on their current debt levels?
ROB: This is a very tough question at my age. It seems not very long ago that we were getting well above 6% interest on Swiss Government bonds, this was back in 1991.
When we bought our first house in 1998, our mortgage was a 4.5% fixed rate. I believed I had the best deal of the century. My last fixed 10-year mortgage rate was 1.25%.
To address your question, yes interest rates could be heading up to these levels during the next few years; helping lenders and hurting borrowers.
You are correct, the gigantic debt of our central banks will then also have to be paid back at a much higher interest rate – which could end in a catastrophe. It would probably mean higher taxes and inflation.
While lenders may like the higher rates we are seeing today, if we see galloping inflation, the higher rates will do us no good. Unless interest rates (after taxes) are higher than true inflation, you are losing buying power every day.
DENNIS: It looks like we’re anticipating a huge Minsky Moment. A bond market collapse, high inflation, and rising interest rates will certainly affect businesses all over the world and their respective stock markets.
No one can time the market; we expected the issue of skyrocketing debt to come to a head years ago. If/when it does happen, there will have to be some real bargains for investors who have cash and were patient.
What are you advising your clients?
ROB: There are times where cash could or should be looked at as an investment and we strongly believe this is the time to have cash on the side. This doesn’t have to be in US Dollars it could also be in Swiss Francs, Pounds or Euros.
We are currently underweight in equities and overweight in cash, foreign currency bonds, and precious metals.
We do not know when this party will end but we want to make sure that we are not the last ones to exit.
You have to stay ahead of the crowd, patience is a virtue and will be rewarded. The stock markets might be holding at these skyrocketing levels for another few quarters, but a big correction is in the cards, then be ready to go all in.
DENNIS: Market historians like to point to an event that sparks a crash. What do you think readers should be looking for? Are there any countries or markets that you feel might be leading indicators of what’s to come?
ROB: What we’ve been seeing since the beginning of the year is indeed very scary, with the Dow dropping 1100 points, and then ending up with a small gain in only one trading day. We do feel a large correction is in the cards in the not too distant future for many reasons.
- We have experienced one of the longest-running bull markets in history.
- Inflation and interest rates might surprise market makers to the upside, bad news for stocks.
- Profit taking on stocks could easily start an avalanche of stop losses, particularly with the programmed traders.
- North Korea, Syria, Iran, Israel etc. could scare investors which could lead to the large correction we expect.
- A trade war between the USA, China and/or Europe could also spark the expected fire.
Pick any of the above, but then again it might come from a completely different angle. We just don’t know. We will be told by historians after it happens and that won’t be very helpful.
It appears that a serious correction is imminent and that investors need to make wise decisions now.
DENNIS: Rob, one last question. I’ve had some readers ask if you ever come to the US. Are you going to be speaking/attending any events in the US in 2018?
ROB: I will be speaking at the Four Seasons in Las Vegas from March 15th until the 18th for the Oxford Club. I’ll be back there again in September for the Total Wealth Symposium organized by Banyan Hill.
DENNIS: As a reminder, I have an account with Rob’s firm, however, we have no other financial arrangements. He graciously gives of his time. On behalf of our readers, thank you again.
ROB: My pleasure, Dennis.
Waiting (and waiting) for something to happen is difficult. With today’s computer traders, a Minsky Moment can be sudden. I agree with Rob, better to be patient than the last to exit the party!
And Finally…
“If you always protect your offspring in a cocoon they will never learn how to fly…”
For more information, check out my website or follow me on FaceBook.
Get your FREE Special Report:
10 Easy Steps To The Ultimate Worry-Free Retirement Plan
Until next time…
Dennis
www.MillerOnTheMoney.com
If you have taken the time to read about Central Banking then you can see this is their Bait and Switch game.Print tons of ” money ” ,drive prices sky high then sale making lots of ” Money ” . Crash the Economy and buy real assets ( gold , silver ,land , machines ) for pennies on the the Dollar . That’s why Cash is King at the crash .They want the real wealth of our nation and they want it for nothing.
If so, if you’re of a mind that a crash is coming you should be accumulating as much cash as possible instead of spending or investing it now.
Then you participate in the gains instead of losing out.
Hi,
You raise an interesting point about cash. Consider this….what if high inflation is what causes the crash? Then you would wish you were NOT holding cash.
Yes, you should be accumulating wealth to take advantage of a crash, if you believe it is coming. If you hold cash, make sure it is in a currency that will not be losing extraordinary economic value.
Best regards,
Dennis
The “smart money” got out of the markets and real estate shortly before the crash of ’29 and the following depression then bought back more of what they sold without taking the risk of losing on the stocks that didn’t come back because they avoided their failures. Many fortunes were made that way.
Of course, cash then was gold and silver and fully dollar value stable, not so sure if today’s fiat dollars are the best cash to be holding today. Even gold and silver, now traded as commodities, may take substantial dollar value losses in a major crash today so other forms of cash (liquid tradable real asset cash) may be more stable this time. Anyone’s guess is as good as anyone else’s at this point, at least IMO.
There was no smart money in 1929. There were people who bought in later, only to get killed later. There were people who owned land and other assets, and who had enough cash or cash flow to not lose their land.
None of the “investors” made it.
“Yes, you should be accumulating wealth to take advantage of a crash, if you believe it is coming.”
I saw what you did there. 🙂 I interpret that to mean that ‘cash’ may or may not constitute ‘wealth’, depending on the type and severity of the crash. If so, I totally agree. My personal attempt to “accumulate wealth” is to accelerate paying off my mortgage in addition to other debt, especially short term or credit card debt. I’ve converted some of my ‘saving’s’ into hard assets, including but not limited to precious metals in various forms, additional land, etc. To me accumulating wealth is not a singular idea, but a varied approach that is predicated on staying out of debt as much as possible.
“Yes, you should be accumulating wealth to take advantage of a crash, if you believe it is coming. If you hold cash, make sure it is in a currency that will not be losing extraordinary economic value.”
I’m thinking a currency that is backed by assets? Oil, PM’s, heck, maybe even a currency held by a country with no debt, China?, would be interesting.
“a currency held by a country with no debt”.
There is no such thing as a country with no debt, doesn’t exist. All paper money is created the same way, through the issuance of public debt. It’s not called FIAT for no reason. Wikipedia’s definition of FIAT: “Fiat money is a currency without intrinsic value established as money…..”
Economically, I would suggest as much as anyone’s situation affords of 1 & 2.
1. Cash-stashed, at least a month on up to six months or more. If the ATMs go down, bank holidays and Bail-ins will clear the decks so fast too many will be trapped. Cash in your hand will be invaluable for awhile.
2. Silver & Gold the balance depending on your degree of money/wealth. I like silver in one ounce coins, 10 ounce bars and pre-64 junk silver coins. Gold in 1/4th, 1/2, 1 oz coins. I’m about 60/40 to the silver side.
3. FARM LAND!
4. Hard assets
5. Not a Bit Coin guy, out of stocks…have a 401k in short term treasures (because the Money Market Fund is dumping them there and you have no choice or say) getting ready cash it in, pay the frigg’in taxes and with whats left build a small 2nd home/FORT in deep woods and rent out old place too near the road.
I have about 65% of my money outside the Banksters and hope to make that 90% unless the SHTF first.
Feel like I’m in a race…
“The federal reserve is raising interest rates and unloading trillions in their US debt holdings”
They may be raising rates but there is zero evidence they are unloading anything of substance. Global central banks are NEVER going to unload that $20 trillion in debt. Mark my words the chart will rise into eternity. The only question will be the slope of the rise.
The only way to deal with the current national and corporate debt, without inconveniencing the ‘important’ people, is massive inflation.
Ask yourself who is going to get thrown under the bus – the average citizen that effectively has no say in such matters and has no meaningful recourse, or the amoral wealthy institutions and individuals that have fully captured the government and quasi-qovernment economic decision making entities?
Meh.
Too narrowly focused on MSM type investment recommendations.
The reality is: inflation is not bad. It is being treated bad today because inflation is the working man’s frenemy. While inflation causes short term discomfort and even starvation, inflation is what causes the overall population to unite against the elites. Inflation is what causes wage growth. Inflation is what erodes debt.
This last point is key: the banksters hate inflation because it totally hoses all their ivory tower projections.
The older crowd here is going to hate what I just said, but then, they were the lucky recipients of one of the largest asset price “inflations” in history: the ginormous real estate price increases since 1975.
Of course luck had notion to do with it – these policies arose entirely due to the Boomers self-serving.
No, the real problem isn’t inflation.
The real problem is we have no growth.