Wall Street fell overnight as Greek bonds sold off sharply and Greek bank stocks hit record lows. Yes folks, the Grexit is back on.
Both sides are digging in. The new Greek government is adamant it doesn’t want to continue with the ‘bailout’ plan when the current phase expires on February 28.
Germany and the EU don’t want to talk compromise and insist that Greece sticks with the program. It’s a nasty impasse. The Greek can looks like it’s hit a wall and can be kicked no longer.
One thing is for sure, if Greece continues with its defiance, you’re going to start hearing a lot about how it will be financial Armageddon for the country if it leaves the Eurozone.
Like it hasn’t been already! Over the past few years, Greece has experienced an economic contraction on par with the US in the Great Depression…you know, the one that the Fed has committed to avoid a repeat of at all costs because of the human suffering involved.
The question is whether markets will at some point start to price in the risk of a Greek exit, or whether it will continue to have blind faith in the European Central Bank to paper over the growing cracks in the monetary union. Right now it’s barely blinking an eye.
Speaking of papering over cracks, did you hear the latest news on global debt levels? According to a new report from McKinsey and Co, total debt levels have increased by US$57 trillion since the financial crisis in 2008.
From the Wall Street Journal:
‘Global debt totaled $199 trillion in 2014, 286% of global GDP. In 2007, total debt was $142 trillion, 269% of GDP.’
What does this actually mean? Well, the number is so large it’s hard to fathom. But it tells you that the global economy has become even more highly leveraged than it was before the crisis. That is, the equity part of the global balance sheet (stock markets) keeps getting smaller relative to the size of the world’s debts.
Which partly explains why global stock markets have performed so well in recent years. When economies expand, leverage benefits the riskiest assets — stocks. But when the expansion stops, equity holders suffer the most.
That’s why central banks are so desperate to maintain growth. But their desperation is exactly what leads to more and more debt growth, which just brings us closer to the eventual day of reckoning. And boy it’s going to be ugly when it hits.
But here’s a question for you. Is the bond market more at risk from a global slowdown than the stock market? Conventional thinking says no…stocks are riskier than bonds.
That’s because bonds have the first claim on cashflows, while shareholders are second in line. But bonds aren’t a safer option at any price. In real terms and in nominal terms, some sovereign bonds now offer owners a negative return. You’re guaranteed to lose money by investing in them.
And this is leading to even more risk taking. Jason Zwieg, who writes the long running Intelligent Investor column in the Wall Street Journal, recently wrote an article about how bond funds are loosening their shackles.
‘Bond investors, break free.
‘Such is the clarion call of the fund industry as it promotes what are called “unconstrained bond funds.” The managers of these portfolios aren’t fenced in by the need to mimic the holdings of market averages like the Barclays U.S. Aggregate Bond Index. Instead, they are unleashed to buy whatever seems cheap.
‘With these managers free to take an unusually wide range of risks, investors should make sure they aren’t taking on too much risk themselves in buying such funds.
‘Unconstrained, or “nontraditional,” bond funds took in $79 billion in new money in 2013 and 2014, or more than twice as much as all other bond funds combined, according to Morningstar, the investment research firm.’
Here’s a quote from the article that should get the alarm bells ringing.
‘“We’ve constructed an all-weather portfolio that can perform well across multiple interest-rate scenarios and protect against negative returns,” says Marc Seidner, lead manager of the $10.9 billion Pimco Unconstrained Bond Fund, which is up 2.9% annually on average over the past five years.’
Sounds wonderful…and a perfect marketing pitch to income starved investors who want more than they could get from a boring old US Treasury bond. For an extra one or two percentage points, it seems like a big risk to take on. The real bubble is in the bond market.
We here at Port Phillip Publishing understand the need for income though. Central banks have waged an all out war on savers these past few years, forcing them to take greater risks to keep the income from their investments flowing.
So we’re currently putting a product together that focusses on generating income growth from a range of investments, while trying as much as possible to manage the risk of doing so.
The product is still in the planning stages but should be ready in a month or two, so keep your eye out for that.
For subscribers of Sound Money, Sound Investments., I’m taking a slightly different tack. I’m simply searching for companies that have been overlooked, are showing good fundamental value AND are in the early stages of a turnaround.
The problem with this is that when you see evidence of a turnaround or an improvement in business performance, its usually in the share price. The market has already factored it in.
Late last year I started thinking of a way around this problem…a way to get into a stock BEFORE the good news was priced in. It turns out the market throws off early warning signs…you just need to know what you’re looking for.
I didn’t. But Quant Trader and charting expert Jason McIntosh does. Jason is an old mate of mine and has agreed to lend his expertise to make sure subscribers are buying into stocks with positive price momentum. That way we get the best of both worlds, a good value stock with the price trending in the right direction.
So far the approach is working. Since implementing it late last year, all stock picks are in the green.
The great thing with this approach is that you come to see the market for what it really is…a market of stocks rather than a stock market. Seeing things this way makes it easier to ignore what the ‘stock market’ is doing and focus on individual companies.
When you do that, you’ll see that there are opportunities in many different areas of the market. The one sector that is shaping up interestingly right now is gold.
With Aussie dollar gold at just under $1,600 an ounce, the fundamentals for Aussie gold producers look good. And the technical signals for gold suggest we might just be emerging from a long and drawn out bear market.
If the bull is back, gold stocks could be the big outperformers this year. Stay tuned for more on this subject…
for The Daily Reckoning