Sell signals and the big debt problem
Governments are starting to pull back on stimulus spending and this U.S. advisory takes defensive measures with the ETFs in its portfolio.
Thanks to stimulus spending, there were some good surprises in the past year.
For the same reason, we may now be in for some nasty surprises.
Debt propelled the stock market through its boom years and debt brought it to its knees. All the debt stacked up by individuals, businesses and governments simply could not be cleaned up overnight.
And another part of the cleanup is about to start, warns a U.S. advisory that speaks to conservative investors.
“Investors have worried about what will happen when the Federal Reserve and other central banks withdraw their stimulus,” we read in Bob Carlson’s Retirement Watch. “But recent economic data and market action indicate that the withdrawal has begun and the transition won’t be smooth.”
Nor do governments really know what will happen when they start pulling the plug, according to Mr. Carlson. We’re in for a bumpy ride.
As we all know, a bumpy ride for the U.S. will always cause more than a few jolts in the Canadian economy.
We’ll see how events have caused Mr. Carlson to shift two ETFs that have done their jobs and are ready to be replaced.
Then we’ll get his pessimistic view of the future and the problem of debt that hangs over the markets.
Sell signals
The markets have changed a lot since “our last visit” in February, the editor tells his readers. “You can expect more volatility in coming months and perhaps more changes.”
Economic data in the U.S. has been disappointing, he says, and the Greek debt crisis has had markets everywhere in an uproar.
The Greek crisis has already seen off one fund in Mr. Carlson’s portfolios. DB International Government Inflation-Protected Bond ETF (NYSE-WIP) was bought in December 2008 to take advantage of a decline in the U.S. dollar. But the problems of Greece set off a flight to the dollar and away from international government bonds.
This fund hit its sell signal early in February. It was bought at $48.60 and sold at $55.28, and also brought a welcome dividend of $0.421 a share. For interest’s sake, it trades today at $54.70.
But bonds may not be the only victims of the current climate. Mr. Carlson also has a sell signal for iShares COMEX Gold Trust (NYSE-IAU). The sell signal is $104, and the fund has dipped below that in intraday trading, but not at closing, and it’s the closing price that triggers the signal.
Today this ETF is trading at $111.21, still above the fateful price. And why is the sell signal on? “Deleveraging by households and excess capacity around the globe are deflationary,” says the editor. “If central banks withdraw their stimulus and that causes economies to slow, inflation will be pushed into the future.”
Gold will ultimately be needed as an inflation fighter, but not yet. Mr. Carlson is getting his best returns from a TCW Strategic Income (NYSE-TSI), a fund that generates lots of cash with mortgage-backed and other securities purchased at big discounts. It trades at $4.60.
Withdrawal underway
Where is debt leading us today? Mr. Carlson points out that the private sector started reducing its debt back in 2008.
Since it was debt-financed spending that supported the economy during the boom years of 2003 to 2007, governments had to step in to supply the money that was no longer coming from private business.
The alternative would have been economic collapse. The question now is, will the markets and the economy move forward on their own when that stimulus is pulled away? “The withdrawal is underway,” states this editor, “and we’ve seen the initial results aren’t positive.”
We saw how the markets staggered when China pulled back on its stimulus lending. “An unheralded factor in pulling the economy from the brink of collapse in 2008 was the China’s extremely strong stimulus program,” he adds.
The key to recovery will be an increase in private borrowing. But we’re not seeing this, Mr. Carlson says flatly. Banks aren’t lending much, and neither households nor businesses are showing much inclination to borrow.
And here is the fundamental problem. “The stimulus and liquidity did a lot to pull the economy from the brink of depression, but none of the underlying problems were solved.”
Consider, he adds, that the total number of people holding jobs in the U.S. is about where it was a decade ago. That’s not progress.
Finally, there is this to ponder. “Central banks and governments will use trial and error to find a level of stimulus that allows them to reduce the growth of debt and spending without damaging asset markets and economic growth.”
The debt problem is so big, Mr. Carlson adds, that they are unlikely to find a safe middle ground. In short, risk is rising, not falling. We’ll give the editor the last word, or shall we say the last warning.
“Investors who don’t practice risk management and who think this is a typical economic recovery will give back most of their recent gains.”
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