Welcome to our latest round of Q&A! This time, my insightful readers didn’t just have questions – they had answers.
- One reader offered an excellent recommendation for how to play the HY bond market – and I wholeheartedly agreed.
- Another brought up a unique way to play gold. (I’m considering incorporating it into my 2016 Gold Briefing.)
We also have some great questions about uranium…mining stocks…my VRX outlook…and my timing for the Super Crash.
Plus a good, healthy dose of old-fashioned paranoia.
Thanks for reading, asking and answering. (And of course, you can add your own contribution to the discussion here.)
Here’s what you wanted to know…
Q: Hi Mr. Lewitt, first off I wish to praise you for your overall very good calls. Next, I have a question for you: just suppose a central bank (say, for argument’s sake, Japan’s?) cancels with a stroke of the keyboard the debt it holds on its balance sheet: what would happen? Thanks. – Giancarlo N.
A: This is a great question that many people ask in a world where governments are monetizing their debts by having their Treasuries borrow money from their own central banks (i.e. Japan, US, Europe). If a central bank were to cancel the government debt it holds, it would likely crash the currency of that country (Japan, US) or region (Europe) because it would signal that the debt was unable to be paid back. We are really in uncharted territory here but I just can’t imagine it is that easy to wipe out trillions of dollars of debt without serious adverse consequences.
Q: You cover miners and commodities to do with manufacturing. What are your thoughts on uranium? – Del S.
A: Uranium prices are recovering due to rising demand for clean energy (i.e. China is building nuclear power plants). If the US were smarter than it is, it would be building more nuclear plants also to reduce dependency on fossil fuels; unfortunately, nuclear plants are not being built due to political opposition and ill-placed fears of a nuclear accident (modern plants are extremely safe). Uranium is probably a good long-term bet but I wouldn’t expect a raging bull market anytime soon.
The uranium index (INDEXCME:URAXPD):
Click to ViewHIGH YIELD
Q: Agree with your assessment of junk bonds. Why not buy long dated puts on HYG? – Alex T.
A: You are quite right. Buying long-dated puts on HYG, JNK or mutual funds would be a good way to bet on the high yield market dropping sharply again. The market has rallied over the past two months but the default cycle is just starting. Peabody Coal, Sandridge Energy and Goodrich Petroleum have now defaulted. The default rate is rapidly returning to its historical average of about 4.5% and will likely exceed that before this cycle is over.
The single factor that worries high yield investors the most is defaults. The default cycle has been delayed by low interest rates but too many leveraged companies are generating insufficient cash flow to repay their low cost debt. I expect the default cycle to run between this year and 2019 and knock off as much as $1.6 trillion of debt worldwide. Buying puts on HYG and JNK is one good way to play that.
Q: Thank you for all your advice. Can you please clarify why you suggest to your readers to put some 20% in equities and “Absolute return strategies-20-40 percent” (which I don’t understand) when you ALSO say the Super Crash is coming in a few months? Why not just gold 20% and cash 80% and wait with ammunition to get in? Thank you. – Dean W.
A: I expect there to be a Super Crash in the next several years but the timing is impossible to predict. (I have gone on record saying that I expect it by the end of 2016, or even by the start of summer 2016, but given recent market behavior, I now believe it is wise to extend my timeline a little.) However, global debt and US debt are running out of control. Central banks are losing credibility. Time is definitely running out.
Absolute return strategies are unique strategies managed by hedge funds and other unusually talented individuals. They are designed to generate consistent positive returns regardless of whether the market is going up or down. My equity recommendation is based on a long-term (decades) investment time horizon – over time, high quality stocks will generate high single digit returns. But they will drop during a Super Crash (which would be a great time to load up on them).
Gold and cash are the safest investments in today’s world. I personally don’t own any stocks today because I view the market grossly overvalued and headed for a fall.
Q: Do you have a current target for VRX you would be willing to share with your loyal followers? – Dane J.
A: The more I look at VRX, the more convinced I become that the company is a likely bankruptcy candidate. We are still awaiting the filing of the company’s year-end financials, but the most recent information available shows a balance sheet with enormous amounts of debt, goodwill and intangible assets. The value of the company’s businesses as well as its cash flows are likely insufficient to overcome a balance sheet that is nothing short of a horror story.
This company is functionally insolvent from a balance sheet perspective. It has cash flow but not nearly enough to repay its $30 billion debt. I think we are looking at a bankruptcy….very soon. I’ve gone into detail about that here, and also offered some long-dated put recommendations.
Q: Thanks for the info. Really appreciate it. I can’t do high priced stock for investing, but I’m wondering about a small company, Bonanza Creek (BCEI). – Pat R.
A: I would avoid small oil and gas companies like BCEI. Small companies do not have the resources to survive a long-term decline in energy prices. Already many small energy companies have defaulted. In a downturn, small companies are at a disadvantage compared to large companies whose banks and bondholders want to see them survive. Small companies have few constituencies who will work for their survival.
Click to ViewQ: Dear Mr. Lewitt, Look forward to all your newsletters and advice. I just wonder with many of the casinos running in the red, is it possible that Caesars Casino would just close completely and the stock would not go up at all? – Paul H.
A: No. The creditors that are owed billions of dollars want the company to continue as a going concern so they can be repaid. CZR owns some great properties in Vegas that are worth a fortune once it gets rid of its private equity owners and exchanges its bonds for equity. I have seen this type of thing many times before and am confident that CZR stock will rise significantly over time.
Q: Is money held (under the $250K limit) in a FDIC insured bank not safe enough? – Ron C.
A: It depends on your bank. Generally US banks are very liquid and well capitalized today, unlike in 2008. But smaller banks or regional banks with high energy exposures could be vulnerable.
Q: Should we have a separate bank account linked to the TreasuryDirect account? I assume we are giving them the right to take money out if we buy T-bills. Are there any risks of confiscation from IRS if the government has our bank account #’s? – Ash M.
A: Treasuries are a good alternative to cash because Treasuries are an obligation of the US government while a money market or cash account at a bank or brokerage firm can expose you to that firm’s credit risk. But we are in the realm of severe paranoia here – for the most part all of these funds are safe today. The IRS can only confiscate your money if you owe them money, even with its high levels of corruption. Stealing money out of bank accounts would start a revolution. We may get there but not for a while.
Q: I have the same question that many others here have asked. Let’s say I go whole hog on gold in whatever form. If currencies have gone into hyper inflationary mode, how do I buy my necessities and pay my bills with ETFS, mutual funds, gold coins and gold bullion? As soon as I convert some of my gold holdings into currency, I have to rush to buy stuff before inflation kills my buying power. Has any country or economy been able to survive off their gold holdings or this is all one big myth to help keep the price of gold going higher? The real function that I see as gold is a hedge against inflation and world upheavals but you still cannot go all in on gold…you still need real estate, farmland, water, seeds, fuel etc. to survive. – Tim E.
A: You won’t be able to go shopping with gold. Gold is a hedge against both inflation and deflation but has to be turned into dollars to be used in every day transactions. Gold is actually trading at a very low value on an inflation-adjusted basis. I agree you need those other assets to survive but gold should be considered an alternative form of money that will protect you from central bankers.
Q: In your 2016 gold briefing, you mentioned that when the financial system fell apart in 2008, the gold price shot up from $700/oz to $1400/oz, but you did not mention how gold miner stocks performed across the board. I don’t have any idea as I was not in the market then. Were the mining stocks doing as well as their metal counterparts back then? – Arnie H.
A good way to see the performance of gold mining stocks is to track the Market Vectors Gold Miners ETF (NYSEARCA: GDX). During the crash, you can see that GDX followed a very similar trajectory to gold – it hit lows of $20.95 on Oct. 1 2008, and then steadily rose up to $62.80 in August 2011. In Dec. 2013 it dropped back down to $21.13 and spent much of the subsequent period trading lower than $20. As I write this, it’s above $23. I expect that it will continue to track with gold next time gold goes up, too.
Click to ViewQ: How about ETFs like OUNZ that allow us to retrieve our position in hard assets? During times of big deltas in the dollar, we could have the hard assets instead of currency for those who do not want to hold large quantities of metal in our safes. – Gerry C.
A: I like OUNZ, and I may update my Gold Briefing to include it. It has been doing fairly well lately.
Click to View
For those who want a little more information, Van Eck MerkGld-SBI (NYSEARCA: OUNZ
) is an innovative physical gold ETF (launched 2014) that allows even small investors to redeem their shares of gold (amounts as small as 1 troy ounce). This is opposed to other physical gold ETFS like GLD, where only authorized participants are allowed to redeem gold, and then, only in whole creation units (like a minimum of 100,000 shares for GLD).
In OUNZ, there is either a minimum redemption fee or a redemption fee per ounce, comparable to the spot markup you pay when buying gold through Kitco or other online gold dealers. And good news – it’s not a taxable transaction.
|1oz. American Gold Eagle
|1 oz. American Buffalo
|1 oz. Australian Kangaroo
|1 oz. Canadian Maple
|1 oz. Australian Bar
|10 oz. Australian Bar
|London Good Delivery Bar
I hope you’ve found this helpful. Keep asking (and answering) great questions!