Juggling Dynamite

Our main story was about Donald Trump. We can’t believe we’re saying that either. Here is a direct video link.

As central banks and QE spirits encouraged yet one more round of levered speculation between 2012 and 2015, ‘hot money’ borrowed in Yen at rock bottom interest rates (and a weakening currency) and bought US denominated stocks and bonds (at higher yields in a strengthening currency). This looked like genius for a bit and helped to drive US asset prices from over-valued to ‘ludicrous mode’.  That was then.

In the spring of 2015, the Yen stopped weakening and began to increase once more against the greenback, much to the chagrin of Japanese policy makers hoping to depreciate the price of their exports through ‘Abe-nonsense’ initiatives.

With the Yen rising over the past year and counting, carry trade speculators are losing badly and having to sell US securities to buy back Yen and pay down Yen based margin calls as capital buffers evaporate.  A similar trigger served to accelerate selling in US markets in 2007 (red circle on left above).

Income-seeking investors are today naively looking for shelter in some of the most heinously over-valued assets of all time.  Dividend income is always sorely insufficient compensation for huge capital losses. Losses of more than 50% were experienced in these equities in both the 2001 and 2008 bear markets. Utilities, financials, telecom, REITs.  Defensive, not!

Not only that, but as many companies have already started doing, once cash flows get tight corporations cut dividends (as they should) and equity holders are left with zero recourse. That’s when capital losses rapidly accelerate as everyone races for the exits at once.  You’ve been warned.

Tell your broker utilities are NOT “safe”… pic.twitter.com/XAhvh4k2KC

— Cory Venable CMT (@CoryLVenable) February 26, 2016

There are wolves in the dividend house… pic.twitter.com/1EGSTq06lr

— Cory Venable CMT (@CoryLVenable) February 26, 2016