Preparing for the worst

Friday, 2 February 2018
Melbourne, Australia
By Kris Sayce

  • An asymmetric crash?
  • Severely adverse

It feels so much like déjà vu. From Bloomberg:

The Bank of Japan announced its first unlimited fixed-rate bond-purchase operation since July, seeking to assert control after the nation’s bond yields rose.

The central bank offered to buy 5-to-10 year notes at a fixed rate of 0.11 percent, and also expanded debt purchases at its regular operation for the second time in a week.

Heaven forbid that bond yields, and therefore interest rates, should rise.

Doesn’t the market know that falling bond yields, and low interest rates are the norm?

And boy, isn’t the BoJ’s intervention timely. The chart shows how close Japan’s bonds were coming to a perilously high interest rate:

chart image

Source: Bloomberg
Click to enlarge

From a lofty 1.06% in 2011…to a basement low of -0.26% in 2016…to a frighteningly ground level 0.08% today. That, it seems, is much too high for the BoJ. And we can assume by extension, much too high for Japanese borrowers.

Is Japan’s corporate debt position so ropey that even a rate of less than one-tenth of one-percent is too much to bear?

The answer must be — yes.

As some form of post script, Japan’s Nikkei 225 index is at its highest level since 1991. That was on the backside of the market topping out two years earlier.

Is it any coincidence that this has happened while rates have been so low?

To that, the answer must be — no. No coincidence at all.

Our crash alert remains on high.


Overnight, the Dow Jones Industrial Average gained 37.32 points, or 0.14%.

The S&P 500 fell 1.83 points, or 0.06%.

In Europe, the Euro Stoxx 50 index closed down 31.94 points, for a 0.88% fall. Meanwhile, the FTSE 100 lost 0.57%, and Germany’s DAX index dropped 0.5%.

In Asian markets, Japan’s Nikkei 225 index is down 171.46 points, or 0.73%. China’s CSI 300 is up 0.75%.

In Australia, the S&P/ASX 200 is up 17.23 points, or 0.28%.

On the commodities markets, West Texas Intermediate crude oil is US$66.16 per barrel. Brent crude is US$69.65 per barrel.

Gold is trading for US$1,348.04 (AU$1,678.05) per troy ounce. Silver is US$17.23 (AU$21.44) per troy ounce.

The Aussie dollar is worth 80.33 US cents.

Bitcoin is US$8,730.69.

An asymmetric crash?

You can see from the price above, that if the bitcoin price rise was a bubble, it appears to have burst.

We’re even more thankful that we told folks to not invest more than they can afford to lose. As we pointed out all along, the potential profit opportunities were (and arguably, still are) immense.

But the risks were big too. You could lose a substantial amount of the dollars you use to speculate.

That’s why our crypto experts recommended using small amounts to speculate. What’s more, they saw (and still see) it as an asymmetric trade.

That is, you may only need to drop in a few hundred dollars. If things didn’t pan out as expected, you could lose a substantial amount of your stake. But what’s a few hundred bucks?

But, if it did pan out as hoped, it could result in returns many times your initial stake.

Even after taking into account the spectacular collapse in crypto prices, the track record for our Crypto Tech Investor service is still stunning by anyone’s standards.

The average return now stands at 581%.

The individual crypto performances are:

  • Crypto 1, up 310%
  • Crypto 2, up 203%
  • Crypto 3, up 1,076%
  • Crypto 4, up 1,695%
  • Crypto 5, up 199%
  • Crypto 6, up 670%
  • Crypto 7, up 360%
  • Crypto 8, up 134%

I know I’ve said it before, but I’ll say it again: I’ve never seen track record results like this before.

Of course, in the interests of full disclosure, that wouldn’t be your return if you had bought the selection of cryptos two or three weeks ago.

It’s likely that most of them would be well in the red. Losses of up to 50% or more. Those are big losses. In fact, let’s assume the average loss is 50%.

In which case, a $100 stake in each of those cryptos, for a total stake (not including fees) of $800, would now be worth just…$400.

If you’re an investor who couldn’t cope with losing $400, then you had no business speculating on cryptos in the first place.

However, the speculator who got in on Sam’s recommendations from the start, could have seen their stake of $800 increase to $5,451…a 581% gain.

That’s the potential asymmetric nature of cryptos. The potential for a big win…but a relatively small loss potential — providing you don’t go crazy and stake more than you can afford to lose.

But more than that, the current volatility in cryptos, and the way we’ve seen some folks get carried away with the craze, is precisely why I’m so pleased we launched the Secret Crypto Network service.

That service isn’t just about buying and selling cryptos. It’s about helping folks understand how they work and why. It’s why Sam Volkering went to the lengths of writing a book.

Sam understands the volatility. He understands the risks. He understands the opportunities. He wants to make sure folks understand it all too…before they dip their toe into the risky world of cryptos.

We launched Secret Crypto Network about seven months ago. It has gone on to become one of our most popular services, with more than 21,000 subscribers.

Perhaps you’re one of them. But if not, I urge you to check it out. More than ever, folks need to understand the real story and the real opportunities with bitcoin and other cryptos.

To find out more, including how to grab a copy of Sam’s ebook, go here.

Severely adverse

More déjà vu.

Again, from Bloomberg:

Wall Street banks must prove they are able to weather a serious global recession as part of an annual Federal Reserve exercise meant to ensure the biggest lenders won’t collapse in a new crisis.

The stress test scenarios released Thursday by the Fed will be used to figure out whether 18 firms including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Deutsche Bank AG are sufficiently sturdy to handle a significant blow to the economy. Good performance could mean banks are given more leeway to pay dividends to shareholders and buy back stock.

As the saying goes, militaries are always fighting the last war.

Police and governments are always fighting the last terrorist attack.

And central banks are always fighting the last financial collapse.

Unaccustomed as we are to the inner workings of central banks, we’ll hazard a guess that the US Federal Reserve and other central banks weren’t entirely idle leading up to the 2008 crash.

We’ll bet our bottom depreciated fiat currency that they were on guard, preparing for the crisis they expected to happen…one that was likely similar to the previous crisis.

Except that crisis didn’t happen. A different crisis happened.

And now, leading up to what we predict will be another major crisis, the Fed and others are attempting to ‘war-game’ the future.

Are they fighting the last war? Or are they smart enough to be able to predict in advance how the next war will play out?

Under what the Fed calls a ‘severely adverse scenario’, it wants banks to stress test for the following:

The global market shock component for the severely adverse scenario is designed around three main elements: a sudden sharp increase in general risk premia and credit risk; a rise and steepening of the U.S. yield curve; and a general selloff of U.S. assets relative to other developed countries.

Furthermore, the Fed wants banks to stress test for the event that:

The U.S. dollar depreciates relative to other developed market currencies due to investor outflows.

As you may recall from 2008, the US dollar strengthened, rather than weakened. Would the same happen again? Would, as in 2008, there be a flight to the supposed ‘safety’ of the US dollar?

Based on the criteria for the stress testing, the Fed would seem to think that the opposite is the riskier of the two possibilities. Should such a thing happen, we would probably agree.

If investors suddenly decide the US dollar isn’t a safe asset, where will they go? Bitcoin? Euros? Gold? Or toilet paper and bottles of water?!

Who knows?

We won’t pretend to know any better than the Fed. And we won’t pretend that our guesses on where GDP will be in the first quarter of 2019 under a ‘severely adverse scenario’ would be any better than the Fed’s guesses.

The only further observation we have on the stress tests are the neat way that the Fed predicts the ‘severely adverse scenario’ will have ended by the end of 2019, assuming it begins during the current quarter.

By then, GDP growth will have recovered back to 2.8%. The stock market will be around 30% up from its low. And unemployment, having peaked the previous quarter, will be on its way southward.

Neat. Too neat, we think.

The Fed assumes that government bond yields would remain low, and at a constant level throughout the three-year period of during and immediately following the crash.

A rate of 0.1% for three-month Treasury notes, 1.9% for five-year Treasury notes, and 2.4% for the 10-year note.

By comparison, the yield on the five-year note fell as low as 0.57% in 2012:

chart image

Source: Bloomberg
Click to enlarge

Does that mean the Fed wouldn’t take its benchmark rate back to zero during the next crash?

Or does it mean that it doesn’t think it will have to?

Or does it mean that the Fed doesn’t want to give the impression that it really thinks such a thing is possible…and thereby spooking the markets?

Again, it’s all guesswork.

Even so, interest rates are trending higher. Consumer spending and debt levels are hitting record new highs. Stock markets are booming. Valuations are soaring.

And our old friend, volatility, appears to be picking up too, as shown by the Volatility Index (VIX):

chart image

Source: Bloomberg
Click to enlarge

The VIX rises when investors are willing to pay more to insure against an adverse market move.

Perhaps investors are telling us they’re starting to worry. We haven’t seen a big move yet, but we’re preparing for one.

Admittedly, we’ve been preparing for it for over three years. But say it often enough, and we’re bound to be right one day.