Royal Bank of Scotland to investors: 'Sell everything'

There are no good options in this world. The bond market is in a massive bubble due to central banks debasing their currencies and entering batshit crazy territory in their quest to suppress interest rates by any means necessary, because they want to hold off having to deal with a mess they have made. They have driven down yields to zero and negative territory in a third of the world, robbing savers to reward debtors, in effect. It is taking more and more debt creation to keep the houses of cards they build standing. Except we are now at negative rates and people seem to finally be losing faith in them over time.

The fact that there is no yield to be had has driven people who counted on relatively risk-free income, into riskier and riskier assets over the last several years -- creating massive bubbles in junk bonds and equities along the way. This is what happens when markets aren't free and are being price fixed. It creates massive misallocations. People don't realize it when the bubble is being created. Only when it pops. It's how you ended up with 2007 / 2008 on the back of reckless monetary manipulation that was quaint relative to the territory they have since entered.

Stocks aren't a good option if you are looking at risk vs. potential reward -- as in, you really understand valuations and are not just gambling without a clue. Stocks are more expensive than they have ever been -- including prior to previous crashes. People are reaching for capital gains and stocks paying dividends (companies are creating dividends on the back of financial manipulation via more and more borrowing, not earnings), to get the income they were hoping from from much less risky assets that don't pay any yield anymore thanks to central banks. If you have invested in equities for the last year plus, you have taken on a great deal of risk (whether you understand it or not), and you haven't been rewarded (despite the nonsense posts on here). All you have gotten is a ton of volatility. Looking ahead, if you understand how to value equities, you know you are taking on a great deal of risk at these valuations for returns that depend on continued monetary manipulation. It's gambling. We are one pin prick from them losing control and the fantasy ending -- much the way it did in 2007, but this time with the debt levels much greater. When they lose control, none of this is sustainable. As for stocks, there is going to be a buying opportunity at levels much below where they are. Things are artificially propped up and when their ability to blow the bubble ends, stock prices are going to crash.

I had CNBC on earlier and Carter Braxton Worth was making some sense about total return relative to beta or risk over the last year +. You have taken crazy risk and have not been rewarded (again, despite the nonsense on here). You should consider yourself lucky that it hasn't been worse than that if you have been gambling that way. There is huge downside risk at these levels relative to any upside you can reasonably hope for -- even with Central Banks rigging the game.

If you are going to buy gold (actual gold), I wouldn't be doing it speculatively or as an investment. Think of it as a currency. If you have no faith in central banks and the crazy territory they have entered, you might want to keep some of your savings in gold (as a currency) rather than in dollars. The gold price is a reciprocal of the world's faith in those idiots. If you don't see the wisdom of that in this era of central banks getting increasingly more radical, consider that since Alan Greenspan started creating monetary inflation in the 1990s, leading us down the rabbit hole, the dollar has lost significant value. A dollar you stuffed in your mattress in 2000 will buy you way less today than it would have then. At the same time, gold in dollar terms has tripled to quadrupled in value. It's what you'd expect. Until they stop -- voluntarily (unlikely) or involuntarily -- it would make sense for gold to continue to appreciating relative to every currency out there being shit on. But I wouldn't look at it speculatively. I would look at it as just trying to keep central bankers from robbing you of the value of your savings.

 

Your portfolio may be up 10 percent by the end of the day. Earnings season is starting. Earnings will be down around 5 percent year over year on average in the U.S this quarter. No matter. Earnings have zero to do with valuations in the insane world they have created. Stocks will open up today. Why? Mark Carney is going to speak soon and has already assured massive monetization of debt (after the Brexit vote). Overnight, Shinzo Abe announced "bold stimulus," setting off a global buying panic (Ben Bernanke went over there this weekend and the markets got into a froth yesterday about him schooling them about "helicopter money.") How is a country that is already carrying a debt load of something like 300 times its GDP going to do that? Monetize yet more debt -- more of exactly what hasn't worked for decades. As usual, it will do zero to actually "stimulate" anything except stocks and other risk assets. They are creating asset price inflation while their economy stagnates -- creating an incomprehensible debt mess on the back of it that assures the stagnation continues for decades more. Japan's central bank owns 30 percent of the JGB market and they are buying their country's own debt at a clip that will make them a 60 percent owner of that debt by the end of the decade. It is a liquidity clusterfuck waiting to happen. It gets worse than that, though, because they have also been buying Japanese equity ETFs directly. 10 years ago, nobody would have believed the madness. In four years they have created a situation in which the BOJ owns more than half of the Japanese stock market. The old Soviet Union is blushing. They are a top 10 shareholder in 90 percent of the stocks that make up the Nikkei Index. Of course stocks have gone through the roof during that time. But again, when a selling panic occurs -- and it is going to because you can not artificially manipulate risk assets higher forever (ask Mr. Ponzi) -- they are going to have printed trillions of dollars worth of yen only to hold worthless assets that there is no actual market for without them. And sadly, people will be SHOCKED by the credit crisis and the suffering left in the wake of what has been utter and reckless stupidity.

It is lifting Japanese stocks for the time being -- but it is gambling on the BOJ's ability to manage a house of cards. People front run these central banks that have now become market manipulators. Buy, and sell to the idiot printing money to buy from you for even more. It is great during the blowing of a bubble -- gamblers get rich, on paper at least. It also drives money here (not that our central bank hasn't done it too -- they are sitting on a debt portfolio of more than $4.5 trillion from several rounds of asset purchases that drove our market up -- with more likely coming now that they gave up on trying to get people used to the idea that have to stop eventually), because anyone who doesn't want to gamble that way (savers who would normally look for SAFE yield on a risk-adjusted basis), has no option except to take on more and more risk to earn any income. So it will drive down yields in the U.S. even more (what has been happening) as our bonds start to look attractive in a relative way, Which in turn drives a whole other group of savers into yet riskier assets, driving up the U.S. stock market. It is madness.

It is also not working the way it was 3 years ago, for example. Which is why our stock market stalled and has buckled a few times on the threat of it ending. Because the deeper in they get, the more monetary injection and debt it takes to keep driving things higher. Right now, the market is reacting to the prospect of more money printing from various central banks -- they got particularly "dovish" with the Brexit vote as an excuse. It will only do so much this time, I think.

I have been trying to describe that phoniness in posts for a few years. Then, maybe what I was saying was a bit more out there, because the conventional thinking was, "This is all temporary. The Fed [insert central bank] won't take it too far and will somehow figure a way out of the corner they are backing themselves into." Now, though, everyone realizes they have backed themselves into a corner they can't get out of -- they need to create more and more debt, and suppress interest rates permanently (even into negative territory if you look at the BOJ and ECB) to keep the massive amounts of bad debt they have created from bringing on a credit crisis and cascading defaults.

The Fed spent a year trying to prepare markets for them having to back away eventually. They really wanted to get out of the box they put themselves in. So we got endless confusing chatter, as they said one thing and did another. When push came to shove, they couldn't do it, of course, because markets started to collapse each time. That is ALL they exist for now -- propping up the stock and high-yield bond markets (and driving student loan, auto loan, etc. bubbles). So they have completely backed off the empty threats, and markets seem happy for the time being. They are back in the fold with the other central banks that have been taking turns in the lead of currency debasement. You have every central bank in the world suppressing interest rates, printing money and buying up trillions of dollars debt (and equities, in the case of Japan) to encourage more and more debt creation on top of the trillions of debt they have already brought about over the last decade. How do you think that ends? We can only exist on endless debt. They need to keep doing more and more of it to prop up what they have created.

There are traders out there who will keep playing with fire and front run the central banks for as long as that is the game. The majority of people are not participating in the paper gains, for what is worth. These are no longer markets of individual investors. Most people have more debt than investible money. These markets are actually being run by computer algorithms that are front running central banks using massive leverage (There are big entities that are borrowing for nothing -- what it is all designed to encourage – and gambling). Which is a whole other story, because the global banking system is a ticking time bomb -- beyond what it was when Lehman went down.

It should worry someone reading my posts, not make them think, "Great, the stock market hasn't collapsed. What does Ragu know?" Those gamblers will try to bail out in time when it is imploding -- some successfully; more not. But few people who make their living in these markets don't understand the seriousness anymore the way they might have 3 or 4 years ago, when they were hoping the Fed wasn't full of shit and could somehow perform a "free lunch" miracle. You can't just keep printing money, encouraging more and more debt, and driving a substantial amount of that money into risk assets. It has no effect on the real economy. And eventually, you are going to get swallowed by the massive debt you have created and the markets you are manipulating upward (the only effect of the recklessness) are going to take themselves back to normal valuations -- valuations driven by *gasp* the underlying fundamentals of the companies they represent (which have been mostly crappy in a perpetually weak economy; earnings have been declining recently and for the years before that were anemic. ... the last decade has been tough).

I have no idea what you own in your "conservative portfolio," but for whatever return you got over the past 6 months (or any time horizon over the last 4 years), you were very likely taking on way more risk than you ever have in the past -- with or without realizing it. And if you look at things the way you should -- return on a risk-adjusted basis (not just find the highest beta things out there and roll the dice) -- you should at least be aware of what is going on around you. That doesn't mean "sell." As I have said in posts, there is a difference between trading and investing, and if you are not on top of markets and have a long horizon (as in a retirement portfolio), my advice is always, find a good mix of assets to diversify risk and dollar cost average in. That doesn't mean that we aren't in uncharted territory in which the past shouldn't be your guide for what is likely going to happen moving forward. Markets are being manipulated into bubble territory via an institutionalized scheme we have never seen. There will be consequences. RBS' advice was best directed at traders, not long-horizon investors who want to buy and hold and ride out a roller coaster. If you are gambling in these markets (not buying and willing to hold 15, 20 years), on a risk-adjusted basis, buying equities has been gambling with casino odds, not investing -- whether you realize it or not. This isn't even like a roulette wheel, because you are taking on massive downside risk for small expected upside at these kinds of unprecedented valuations -- stocks are ridiculously expensive by any historical metric, because earnings have not kept pace with the price appreciation central banks have engineered. My point has been that many people have gotten lulled to sleep by bull markets and they have no idea how nasty bear markets can be, so they aren't prepared for what they think they are OK with. And they are going to freak when the inevitable happens now.

All of that said, the least of the fallout will be that the stock market dumps -- because most people don't even own stocks anymore. It's going to be the fallout from the future economic growth we robbed ourselves of to run up debt in the present to live a fantasy. It’s sad.

 

There are so many debt overhangs out there, it is even more difficult than it was in 2004 or 2005 or 2006 or 2007 to even guess what implodes first. There are three areas I am keyed in on, I guess, with the caveat that there is no way to make the bet, because debt messes can get blown up much bigger than my ability to remain solvent waiting for reality to kick in. Remember, Mike Burry was 100 percent right about the housing implosion. He also almost went bankrupt and almost lost hundreds of millions of dollars waiting.

1) General bets against sovereign debt. There are going to be defaults eventually. Italy obviously. The whole Eurozone is a slow motion train wreck. But even Japan. Their debt to GDP is eye popping. Take away the notion that the yen is a safe currency -- blind faith -- and it is game over for them. I wouldn't make that bet, though, because it passed critical mass a decade ago. Can you wait years more?

2) European banks. Several Italian banks are teetering right now -- Banca Monte dei Paschi dei Siena, the oldest bank in the world predating even Columbus' voyage has $25 billion of nonperforming loans. It is insolvent. There are banks all over Europe like that, that can only teeter along precariously with the ECB suppressing interest rates. Rates rise even a modest amount and they are wiped out. Deutsche Bank is a sinking ship. And the amount of leveraged debt to bubbled up areas it is holding is a staggering percentage of the German economy. It is much like where Bear Stearns was in 2007. The stock price also has already been reflecting it. In mid 2006, it hit a high of about $160 a share (the U.S. ADR). It is now down to $12.50 a share and still sinking. Without a bailout at some point when its balance sheet creates a crisis (and I have no idea if it will happen or how they can make it happen), it will be worth zero eventually. It is insolvent and simply being propped up by the ECB.

3) China. I can write a long post. Just google up anything about Kyle Bass' bet against Chinese debt and the yuan and read what he has to say (he has been vocal -- just getting ignored the way he was prior to the housing crisis). Here is a short report on Bloomberg last month with some context.

Kyle Bass Predicts China Bank Woes