My grandfather, William Paul Smith was an ordinary dairy farmer with a degree in common sense. One of his favorite sayings was, “It’s the same thing, only different.” 70 years ago, he warned me not to throw rocks at a wasps’ nest. As I cried and put ice on the sting, he explained what happened always happens – and I got stung! I thought I was different – and could outrun a wasp – and had to learn the lesson the hard way.
His sage wisdom does not just apply to children. Why is it that many lessons are constant, yet even as adults, we choose to ignore warnings and learn the hard way?
| “The four most expensive words in the English language are this time it’s different” – Sir John Templeton |
Good friend Chuck Butler, writes for Dow Theory Letters, a terrific publication. Chuck recently asked, “Will This Time Be Different?”
His headline reminded me of my grandfather. Warnings are appearing regularly – are they being ignored?
Subscribers are concerned. Mike L. recently asked:
“What do you think will happen with the dollar and today’s retirement plans if bonds tank, no one buys our debt, and other nations continue to conduct trade deals without using the reserve currency, etc.?”
Chuck warns:
“I’m only going to say this once … This is all headed for a Minsky moment. … A Minsky Moment is when a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. I’ve moved that over to debt accumulation instead of a market.”
I contacted Chuck. Will the Minsky Moment appear in the stock or bond market? What can individual investors do to avoid getting stung?
DENNIS: Chuck, on behalf of our readers, thank you for taking your time for our education. Let’s get right to it.
Before I get into specific questions, you discussed a ratio of household net worth to income. I’ve never heard of that before. Can you explain it, and what it means for our readers?
CHUCK: Dennis, thank you for inviting me to share my opinions and thoughts from many years of investment experience with your readers. I get a kick from doing these interviews, just so you know!
Anyone with a home mortgage falls into this ratio… Basically, you take the house’s value, (easily obtained from Zillow.com) and you subtract what you owe on it. Simple, right?
Add up all of your income and divide it into the net worth figure you just calculated. The higher the number the higher the risk. If the house’s value falls, the income could be eaten away with just mortgage payments or increase the chance of defaulting on the mortgage.
Before we got crazy with home values in 2004-2007, this ratio was around 5.1%. In 2007 it peaked to 6.5%, and we all know what happened then. Lo and behold right now it’s 6.75%!
| Some pundits and economists are saying, “This time will be different”… I just cringe when I hear those words! |
DENNIS: I’ve noticed a lot of ads encouraging people to refinance their homes while rates are still low, suggesting they can take some of the equity and pay off their credit cards. That only works if they cut up the damn credit cards. If millions of consumers refinance, basically taking equity out of their home, what impact will that have?
CHUCK: In 2005, I told my readers that consumers were using their houses like ATM machines, taking equity out of their homes to buy SUV’s, big screen TV’s, and fancy clothes. That was all fine until the house values began to fall, and now the consumers owed more on their house than it was worth.
Never in a million years would I have thought that we would again fall for that idea that house values will never fall, especially so soon after the last crisis and collapse. But here we are again…. And it’s all going to end up just like the last crisis, but this time, it will be worse, because we never cleaned out the excesses of the last boom period.
Banks and financial institutions have more derivatives on their books now, than they did before 2007…. Like your grandfather said, same thing, only different…and worse.
DENNIS: Our mutual friend, Dr. Lacy Hunt echoed your remarks about consumer credit growing at the fastest rates in 16 years when he recently wrote:
“Consumer spending, the economic heavy lifter of U.S. economic growth, has expanded by 2.7% over the past year…. Real disposable personal income rose by only 1.9% over the past year. It was only the ability to borrow that supported the spending increase. In economic terms,borrowing is a form of dissaving.
…. the only period in which the saving rate was lower than it is today was 1929-1931…” (Emphasis mine)
Chuck, I know you call it the “stupid” Consumer Confidence Index. It’s currently 94.4, which is doggone high. Consumers are so confident, they are “dissaving” at a historically high pace.
You are warning a lot of overconfident investors they may get stung – and badly! If debt is the issue, wouldn’t the Minsky Moment start in the bond market?
CHUCK: It just may do that Dennis. You see a Minsky Moment happens when everyone is complacent about the assets and thinks that nothing bad could happen, so they get overconfident and decide to take on more risk. At that point, the Minsky Moment is just around the corner.
What could cause a Minsky Moment in bonds? Well, think about this for a minute. The U.S. Fed has been a very large bond buyer since the first round of Quantitative Easing began in 2009. They bought boatloads of both U.S. Treasury bonds and Mortgage-backed bonds. Look at their balance sheet, it increased five-fold to over $4.6 Trillion in 2017.
The Fed announced a “tapering” in 2015, but they kept buying Treasuries to replace bonds that matured. Late last year they announced that they were going to stop buying bonds altogether. No replacement bonds, no auction window buying.
The question was… “Who is going to take the Fed’s place”? Well, there has been no one, to date, and the 10-year Treasury yield has risen from 2.05% on Sept. 8, 2017, to 2.65% on Jan. 18, 2018. That’s just the beginning, in my opinion!
The Fed may not be the only “no show” at the auction window. China is considering slowing down their Treasury purchases or halting them altogether! Guess who else has been slowing down their Treasury purchases? Saudi Arabia, and Russia… Oh-no! Say it ain’t so, Joe!
This is the Minsky Moment for bonds…no big Central Bank buying, will drive yields much higher. It could easily be followed with another Minsky Moment for stocks.
When interest rates hit historic lows, money flooded into the market as investors were desperately searching for yield. As yields rise, the tide will quickly turn, and mom and pop stock investors will take the risk out of their investments and go back to bonds.
DENNIS: One final question. Many of our readers are clearly seeing the signs, fearing a Minsky Moment is inevitable, but not sure about imminent. They don’t want to get hurt. When the Minsky Moment eventually happens, I believe it will be different – it will be uglier than most investors have seen in their lifetime.
What advice would you give our readers to protect themselves?
CHUCK: Well, you know me well enough Dennis that you could answer this question for me! But here it goes…
First of all, the dollar is going to be held hostage by all this chaos, expect high inflation. Diversify into euros, sterling, Aussie dollars, kiwi and some others would be prudent. In addition, either a new purchase of up to 20 to 25% of your investment portfolio in Gold & Silver, or an increase in your holdings.
I feel that Gold & Silver are going to replace all the hoopla of Bitcoin, and I also feel that once that happens there will be supply problems, thus raising the prices of these metals even higher.
There is a positive side. Those who heed the warnings will be presented with some terrific buying opportunities.
I thank you for allowing me to give my opinions and thoughts, Dennis. You have very astute readers, and I’m sure they will hear the calls to take defensive moves in their investment portfolios. As I said before, I get no kick from champagne, flying too high with some gal in the sky, is my idea of nothing to do, but I get a kick out of writing for you!
DENNIS: (chuckles) That was clever! Chuck, once again, on behalf of our readers, thank you.
Both Chuck and Lacy Hunt clearly point to similar warning signs of previous “Minsky Moments” where millions of people lost a lot of money. The same thing, only different?
We have a new generation that’s not been stung badly enough and learned a lesson. The warnings are there for all to see – some will heed them, take precautions, diversify, keep debt under control, keep stop losses current – and take advantage of some great opportunities when they appear. Others will ignore the warning signs. Why do so many of life’s lessons have to be learned the hard way? You can’t outrun a wasp!
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Source: Investors Alley