Welcome to 2011, a year that promises to be exciting as the global economy attempts to secure its 'recovery'. We strongly believe 2011 will be the 'make or break' year for this global recovery. The rules of the recovery have been laid out for us. Throw money at every corner of the financial system, buy as much debt as necessary and forcibly keep interest rates at record lows. All this so that hopefully, in time, jobs will be created -- along with wealth.
Government intervention and manipulation remain at all time highs. The monetary actions taken by the Federal Reserve and other central banks around the world are in play. The euro debt crisis dominated market fears in 2010 and will continue to do so into 2011. Our team is expecting things to worsen in Europe within the first quarter. This is good news for gold bugs.
The US is far from out of the woods, but our team is confident we can play by the Fed's rules, to benefit our own financial prosperity. Follow the golden rule and never fight the Fed because you will lose. The Fed has essentially rigged the system for the short-term and taking what it gives us is the only way to make money.
Commodities hit record highs in 2010, which we predicted (specifically silver) and have been bullish on for years. We expect more bailouts in Europe and with the Fed printing more money until June, a continued devalue of the US dollar is imminent. Don't get caught up in the weekly sentiment swings. They are tiring and we've seen them come and go for years. These swings are made to scare people in and out of the market so the pros can make a killing off the emotions of unsuspecting investors.
The simple facts and numbers don't lie. The debt bubble is gaining momentum; not just amongst countries which continue plunging into debt at record speeds, but amongst major corporations and citizens as well. The 'debt bubble' is something we expect to hear more about as 2011 rolls on.
The bond market has been fuelling the debt bubble to this point and is now finally coming under pressure. We are in the midst of a renaissance in corporate debt issuance to the likes of which no one has ever seen. Worried investors have poured into bonds at insane levels over the past 2 years, which ironically saw them miss out on record gains in the stock market.
There are many signs indicating the bond market is not a sound place to invest your money. Bond buyers are beginning to wake up to the reality that they deserve a much higher interest rate to compensate for the risk of future inflation and a weak US dollar. The Fed has succeeded in maintaining an illusion of demand for US Treasuries, keeping interest rates low, for longer than most expected. We'll be keeping a close eye on how this keeps up in 2011. The ensuing debt bubble of 2011 and beyond represents the desperateness of the Fed and central banks worldwide.
Didi Weinblatt, Vice President of mutual fund portfolios at USAA Investment Management (worth $45 billion) in San Antonio, stated, "Rates are so low that companies are having a contest of who's going to issue at the lowest."
Every blue chip company on the block is taking advantage of record low rates and the atmosphere is quite simply obscene. Countries around the world are now joining the party and no one seems worried. Insanity is back in a new form.
It started in the middle of 2010 with Johnson & Johnson (JNJ), who sold $1.1 billion of bonds at the lowest interest rates on record for 10-year and 30-year securities.
The deal which took place in August of 2010 represented the first offering by a non-financial AAA rated company in 15 months and it opened the floodgates. Johnson and Johnson sold $550 million of 2.95%, 10-year notes and another $550 million of 4.5%, 30-year bonds. Johnson and Johnson should have waited.
Walmart smashed the record in October after selling $5 billion of debt at the lowest coupon rates ever. The first part of the transaction consisted of $750 million of three year debt at 0.75%, which yielded 30 basis points.
Just for clarification, a rate of 30 basis points equals the current (first week of January 2011) 1 year Treasury Note! For all of our members that might not know, the current Treasury yield represents a rate at which the US government determines the investment is risk free. That is why Treasury Notes (which scared investors buy in times of uncertainty) are guaranteed by the US government. If you buy $10,000 worth of a 1 year US Treasury Bond, it will return you 0.30%. Companies are being given billions of dollars at less than a percent. If that isn't money for nothing, we don't know what is.
Wal-Mart's (WMT) October bond offering followed its $3 billion, three part debt sale in June of last year.
This is a trend that is quickly spreading across the country.
Bloomberg data shows that the Wal-Mart offering ties Kreditanstalt fuer Wiederaufbau, Novartis AG and Lloyds TSB Bank Plc, who all issued $5 billion offerings in 2010.
Bloomberg also reported that Kraft Foods Inc. (KFT) sold $9.5 billion of debt and Berkshire Hathaway Inc. (BRK.A) raised $8 billion in February. These were 2010's largest U.S. corporate bond offerings. Although the rates were not as favourable (or unfavourable depending on how you look at it) as Wal-Mart's, historically they were very low.
In November, Colgate-Palmolive (CL) sold $438 million of two-part senior unsecured 5 year notes for 1.375 %. Bank of America (BAC), Merrill Lynch, Citi (C) and Goldman Sachs (GS) all took part in the sale.
Coca-Cola (KO) couldn't resist the cheap money and tested the very limits of the rally in the US corporate bond market by selling debt at a record low rate of 0.75%. It now shares the title of lowest three year debt rate issuance ever with Wal-Mart. It was more 'conservative' however, and instead of issuing $5 billion, sold only $4.5 billion in a multi-part deal.
Back in July of 2010, McDonald's (MCD) issued $450 million of corporate bonds at a (then) shocking rate of 3.5%.
At the same time Byron Douglass, senior analyst at Credit Derivatives Research, made this statement, "Bond inflows are creating huge demand for corporate bonds. However, the aggressiveness on today's pricing seems a bit overdone."
Mr Douglass was 6 months early (and 3% points off) with his prediction.
Lon Erickson, managing director at Thornburg Investment Management stated, "The market is very open for these big name companies to sell big deals at very low rates. It is pretty cheap money. We will probably see more."
eBay (EBAY), Microsoft (MSFT) and IBM (IBM) also sold bonds at record low levels in 2010.
Beware. The chances of a debt bubble or crisis will become very real if not in 2011, then in 2012 for sure. At some point the appetite of debt buyers or bond buyers will begin to dissipate.
When potential buyers of debt will only lend at increasingly higher interest rates, then we will witness serious blowbacks.
The Fed has been driving this hysteria in the bond market and the period we find ourselves in of record low interest rates.
There is a culture and expectance of cheap debt emerging in all of our societies. The longer our central banks are forced to keep interest rates at record lows, the harder it will be for us to wean ourselves off of the 'low interest rate drug'. For all who have refinanced their mortgage in the past few years, or for every company that has taken a loan or issued debt to expand, be prepared for a changing environment. These low rates cannot last forever.
Take a look at Ireland, which saw yields on 10-year Irish government bonds jump from roughly 6% in November to almost 9.5% towards the end of the month.
What didn't make headlines is that U.S. government 10-year debt rose from 2.4% to 3.2% since the lows in October 2010.
We are expecting a Quantitative Easing 3, probably sometime between Q2 and Q3. And we all know what that will mean for gold, the US Dollar and commodities (our bread and butter).
Our team is hungrier and more inspired than ever to stay a step ahead of the markets, while increasing our research on featured companies poised to take advantage of this commodity super bull market. 2011 will be a fun year for investors who are willing to adapt to the environment the Fed has created. Don't fight the Fed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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