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About Jim Walker

Jim Walker has been a member since November 8th 2010, and has created 799 posts from scratch.

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Will Inverted Bond Yields Cause Your Investments to Crash?

At the beginning of last year, we asked if you should be concerned about the inverted yield curve. The fact is that many previous market crashes and recessions have been preceded by “inversion” of rates on long term versus short term bonds. The timing of this “predictor” is such that it may be a year or two after bond rates change that the market crashes or the economy suffers. There are two questions here for investors. One is whether or not this episode of interest rate inversion will be followed by a collapse of the longest bull stock market in modern history. The other question is this: Will inverted bond yields cause your investments to crash. The uncertainty of the protracted Trump trade war with China and everyone else makes it difficult to predict where the economy and the market are going. And, already-low interest rates may make it difficult for the Federal Reserve to respond to a downturn in the economy.

What Is an Inverted Yield Curve?

Investopedia discusses the inverted yield curve.

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.

Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in late 2005, 2006, and again in 2007 before U.S. equity markets collapsed.

Normally, bond investors demand a higher interest rate for locking up their money in a fixed-rate instrument for longer periods of time. Right now they are willing to purchase five, ten, and even thirty-year Treasuries at lower rates of interest. This means that these folks believe that interest rates will be lower in the future and will stay low for a long time. If the economy tanks along with the US stock market, the Federal Reserve will most-likely lower interest rates.

Japan: An Example of Long-Term Low Interest Rates

Normally, we would not think that rates in a major economy would remain low for years or even decades. But, one only needs to look at Japan. In the 1970s and 1980s, during Japan’s boom times, rates ran between 4% and 9%. By the late 1990s, their rates ran between 1% and 0% with brief periods of negative interest rates. (Trading Economics)

If you doubt that inverted yields can predict low term low interest rates, look at historical Japanese interest rates

Will Inverted Bond Yields Cause Your Investments to Crash?

The first part of this question has to do with how often inverted yields have preceded a market crash and/or recession and by how many years. Is this really a reliable indicator?

Accuracy of Inverted Yields as an Indicator of Recession and Market Correction

Reuters writes that this is a countdown to recession.

The U.S. curve has inverted before each recession in the past 50 years. It offered a false signal just once in that time.

So, this is a pretty reliable indicator that economic troubles are ahead. But, how long will it take after yields invert before the economy and stock market tank? The yield curve inverted in 2005 and again in 2007. Although the 2007 yield curve inversion immediately preceded the Financial Crisis, the 2005 inversion preceded it by slightly more than two years. The thing to avoid here is to believe that the 2005 inversion was a “false alarm.” Long term bond investors are a cautious group. As such, they may sniff out economic trouble and make smart decisions with their bond purchases while everyone else is happy buying into a market that is ready to correct or crash. These folks are using the same sort of approach as with applying intrinsic stock value to their stock purchases. Is should be noted that before the dot com crash that Warren Buffet pulled lots of money out of the stock market because he said did not make sense. And today, he is doing the same as we noted in our article, Silent Warning for Investors.

Will Your Investments Survive a Recession and Stock Market Crash?

This is really what the inverted yield curve issue is all about. Last year we wrote about how to invest without losing any money. The argument we made in that article is that part of your investment portfolio should be in vehicles like US Treasuries, AAA corporate bonds, and bank CDS that are protected by Federal Deposit Insurance. In this part of your portfolio, you will forego growth in favor of safety. And, if today’s inverted yields are an accurate indicator of a coming recession and crash, this part of your investments will be protected against devastating loss.

That having been said, are there ways to keep a foot in the market and protect your investments?

Using Stock Options to Protect Your Stock Investments

Last year we wrote about how to use options to protect your investment portfolio. Our suggestion was to consider buying put options on stocks that you believe are in danger of a correction but still have some room to run.

Market Watch also mentioned buying puts in an article about four ways to protect your stock portfolio using options.

When you buy puts, you will profit when a stock drops in value. For example, before the 2008 crash, your puts would have gone up in value as your stocks went down. Put options grant their owners the right to sell 100 shares of stock at the strike price. Although puts don’t necessarily provide 100 percent protection, they can reduce loss. It’s similar to buying an insurance policy with a deductible. Unlike shorting stocks, where losses can be unlimited, with puts the most you can lose is what you paid for the put.

This can be a very effective strategy for those who know how to use it. That includes picking the right strike prices and options expiration dates. Successful use of this approach also includes knowing when to use it and when to avoid the repeated expense of buying new put options when the old ones expire.

Bitcoin Pump and Dump Again?

And a bitcoin security warning

Remember the 2017 Bitcoin pump and dump? It seemed like an epic bull run for the cryptocurrency but ended in a crash. Bitcoin started 2017 just below $1,000 and rose during the year. Bitcoin “enthusiasts” hyped the cryptocurrency as the “investment “of the future while long term successful investors called it a scam. After Bitcoin fell from the $20,000 range to the $3,000 range at the end of 2017, all of the Bitcoin hype went away, for a couple of years. However, it appears that we are seeing a Bitcoin pump and dump again. This writer was watching the morning CNN business show and an interview with the “head investment analyst” of an outfit I had never heard of. The storyline was that central banks are all competing to devalue their currencies and that only gold and Bitcoin are safe stores of value. Then, we saw a security warning about Bitcoin in Forbes as well. What is going on?

Bitcoin and Pump and Dump Scams

Investopedia explains pump and dump scams.

A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once the stock price has risen following the surge in interest as a result of the endorsement.

As Investopedia explains, the pump consists of an “information campaign” or series of “hot tips” suggesting that the stock, or in this case the cryptocurrency, is about to skyrocket. And, to the degree that the first efforts are successful, the “pumpers” can point to recent price increases as “proof” of the validity of their “predictions.” Usually, this approach is limited to OTC micro-cap stocks or penny stocks and is intended to corral a handful of unsuspecting (and greedy) investors. However, in the internet and mass information age, the approach can work with things like Bitcoin as well.

The old advice is that when you start hearing an investment being promoted by your taxi driver, it is time to avoid the investment or get out if you have already invested. This writer was looking at vacation and retirement property in Colombia in late 2017 as Bitcoin was passing the $12,000 mark. The realtor I was using was more interested in explaining how she had taken all of her savings out of the bank to buy Bitcoins and was thinking of putting a mortgage on her home. I never did hear how it worked out for her but two months later Bitcoin had peaked at $20,000 and was down to the $5,000 range on its way to $3,000.

Are Gold and Bitcoin Stores of Value?

Your home is a store of value as someone can always live there. Your farmland in Iowa is a store of value because people will always need food. A multinational company with a huge range of products, like 3M, is generally a store of value because they make things that people use all over the world. Investing in gold is being hyped right now along with Bitcoin as a way to protect your wealth as central banks rush to devalue currencies. The argument of gold is that it has held its value in relation to things like food and clothing for centuries. However, that is not really true. Gold goes up and down as investors worry about the stock market, their nation’s currency, war, and social unrest. Gold started the 1970s at $32 an ounce and hit $800 in the early 1980s before it crashed. It sat in the $200 range for nearly 20 years until the next bull market. Gold always has uses in industry and for jewelry. That is not the case with Bitcoin.

The Fiat Cryptocurrency

The current “pump” for Bitcoin is that paper currencies have no intrinsic value. And, central banks are working actively to devalue them all across the globe. But, currencies like the US dollar, Euro, Yen, and Yuan all have substantial economies to fall back on. Bitcoin, the other hand, has no backing, no economy on which it is based, and no “use” such as for jewelry or in industry. Nevertheless, the current “pump” for Bitcoin plays on the fear few or predicted economic collapse.

Can You Make Money Trading Bitcoin?

Anyone who had the good fortune to buy Bitcoin years ago for pennies each or even at the start of 2017 when it sold for less than $1,000 has done well by simply holding on to their Bitcoins. And, anyone who had the good luck to sell at the end of 2017 when Bitcoin sold for nearly $20,000 made out like a bandit. But, aside from listening to the “pump” arguments, there is no good rational way to buy and sell Bitcoin. If you believe that currencies across the world will lose their value, there are always precious metals like gold. Real estate in growing areas will tend to hold its value as well. These and other investments have two things in common. They have a bottom price that is not zero and they have a way to assess intrinsic value. The same cannot be said for Bitcoin and other cryptocurrencies. And, then there is the risk of having your Bitcoins stolen or being scammed in some other way.

Bitcoin Security Alert

Forbes published a report about a Bitcoin security warning.

Researchers have warned a staggering four out of the first five results returned when asking Google for a “bitcoin qr generator” led to scam websites.

If a user of one of these scam sites tries to generate a QR code for their own bitcoin address, it will create a QR code for the scammer’s wallet, researchers from ZenGo, a bitcoin and cryptocurrency wallet provider, found.

The amount of money that has been stolen this way is not clear.

Last month, it was found bitcoin and cryptocurrency fraudsters stole over $4 billion of digital currency from investors and users in the first six months of 2019, a significant increase on the $1.7bn stolen in 2018.

These stolen funds were a result of “outright thefts” from cryptocurrency exchanges, but also scams, according to U.S. cyber security research company Ciphertrace.

Money that you put in a US bank is insured by the Federal Deposit Insurance Corporation. US Treasuries are good unless the government collapses. Put your money into Bitcoins and no one is going to insure your losses when a hacker breaks the code and transfers a few million from your wallet to theirs.

Is This the Bitcoin Pump and Dump Again?

When we write about “stock tips,” we always recommend that you use some sort of fundamental analysis to make sure that the investment makes sense. Unfortunately, there is no way to examine fundamentals of Bitcoin and other cryptocurrencies as they have not basic or intrinsic value. Thus, all of the talk in support of investing in Bitcoin amounts to hype and a return to the pump and dump of 2017.

Why Invest in Berkshire Hathaway?

Warren Buffett has become one of the richest men in the world by using intrinsic stock value as a guide to investing for Berkshire Hathaway. But, Berkshire Hathaway is now a huge company with multiple holdings. There is a temptation to say that it has reached a mature state where there is not much more room to grow. Is that true? We don’t think so. So, why invest in Berkshire Hathaway today? The first reason is that the stock is undervalued.

Is Berkshire Hathaway Undervalued?

The Motley Fool says to in their article about three reasons to buy Berkshire Hathaway.

Over the last decade, Berkshire Hathaway has become a certified cash cow of the first order.

The gap between the stock price and the long-term value of the company has been widening lately.

They cite the profits that his whole owned companies generate and the fact that if they were to go public again, their values would be a lot higher than the book value at which they are now valued.

In addition, Buffett has been buying back shares. He has always been hesitant to do this, but as he sees his own stock as a bargain, he is buying his own shares at the rate of about $2 billion a year!

Why Invest in Berkshire Hathaway for the Long Term?

Many of us equate Berkshire Hathaway with Warren Buffett. As such, many might be tempted to get out of this stock when Buffet is no longer active in the business. However, the “Oracle of Omaha” has also been the planner and teacher of Omaha as well. Each of Berkshire Hathaway’s sixty business segments is run by someone who was trained by Buffett and follows his approach to fundamental analysis and working with the long view in mind. We can fully expect the company to follow the same approach to investing and business management when Buffett is no longer in the picture as now when he is still running the show.

Why Does Buffett’s Approach to Investment Work?

Buffett’s approach to investment, which he learned directly from non-other than Benjamin Graham, is simply to analyze an investment for its projected profit potential, determine an “intrinsic” value based on that assessment, and compare the intrinsic value to the current stock price. He has admitted that he and his team toss out 95% of stocks they analyze as being too difficult to make an informed judgement on. But, when they do pick a stock this way, they typically hold it for years. Buffett has been quoted as saying that his favorite holding period for an investment if forever. And, he and his team pick investments with that in mind. Thus, Berkshire Hathaway is comprised of companies selling products and services that are not likely to become obsolete with changes in technology and are likely to grow and produce more profits year after year after year.

Ready for the 2020 Recession?

The recovery from the Financial Crisis has been impressive and prolonged. However, a combination of factors is causing headwinds that the US economy may not be able to overcome. While pundits in the media, social and print, argue both sides of the issue, the bond market is betting heavily on an economic downturn. Are you ready for the 2020 recession? Here we will look at why next year is likely when the economic “ax” will fall and then what you can do to protect your investment portfolio.

Will There Be a Recession Starting in 2020?

The trade dispute with China has gone from being a protracted trade war to likely being a permanent trade war. The Trump tax cut was a bust for investment and hiring. And, on top of that, the national debt is soaring even higher as the promised economic benefits of more jobs, more income, and more taxes have not come to pass! But, analysis may be wrong and, maybe, we can just close our eyes and hope for the best. Right? Wrong!

The New York Times has a good article that looks at how the recession of 2020 could happen.

The chances that the nation will fall into recession have increased sharply in the last two weeks.That is the unmistakable message that global investors in the bond market are sending. Longer-term interest rates have plunged since the end of July – a shift that historically tends to predict slower growth, interest rate cuts from the Federal Reserve, and a heightened risk that the economy slips into outright contraction.

They refer to the chances of a “self-inflicted” recession with these causes:

  • Business uncertainty tied to how Trump is playing the trade war game
  • Softening of business spending as the tax cut windfall is wearing off
  • Central banks across the globe with limited ability to respond to a financial crisis
  • Populist turning inward in many major economies

An interesting observation they make is that previous recessions have followed the collapse of incorrect and irrational beliefs:

  • 2001- The internet would lead to perpetual growth with a new kind of stock market.
  • 2007- The housing market would never collapse in all parts of the country at once.

To their observations we add the 1929 crash which was preceded by the belief that a brand new world of wealth was in store and that one only needed to “play the market” to become rich. (For more on this topic take a look at our article about intrinsic stock value.)

Another is the lack of leadership that led the United Kingdom into the Brexit mess.

And, we add the ambitions of the Chinese Communist Party in believing that the rest of the world would passively stand by while they targeted all of the high-tech sectors for dominance over the coming decades. Their apparent short-sightedness is based on the desire of a small group of oligarchs to maintain their authority, power, and personal wealth above all.

Lastly, we believe that Donald Trump may be an effective rabble-rouser and outright demagogue who can get votes, command the attention of the media, and perhaps even get re-elected. But, we also believe that he simply does not have the horsepower for this job. The most effective ways to maintain peace and prosperity in the post-WWII era have been with coalition building, confidence building, and maintaining the strong historical alliances that were so painstakingly built in the aftermath of the last World War. Trump’s willful destruction of our alliances may, in the end, be that which causes the most damage.

What Does Money Say about a 2020 Recession?

Pundits can write what they want but, to our way of thinking, the best evidence is in what people are doing with their money. And, that is where an inverted yield curve and decreased corporate investing and putting money into stock buybacks are the canaries in the coal mine that have stopped singing and are warning us to get out now.

How Do You Get Ready for the 2020 Recession?

With the trade war being a major issue in a coming recession, many investors will look for stocks that are not affected by problems with China or elsewhere. As interest rates go down, utility stocks go up in value as their dividends do not necessarily fall with interest rates. A while back we wrote about how to invest without losing any money. This article focused on a buy and hold strategy for Treasuries, AAA and AA bonds, ladders of CDs at your bank. This is likely what many investors are doing now as they lock in today’s rates before the Fed is forced to cut rates again to fight the 2020 recession. The last part of that formula was to look for stocks that will weather the storm, will become bargains as the market crashes, and will turn into excellent long term investments. That may be the best strategy for getting ready for the 2020 recession. If you want to look for an example of someone getting ready to buy value investments when the market falls, look at our article about the silent warning for investors in which we note that Warren Buffett is accumulating an impressive hoard of cash. Many believe that he simply does not need any stocks that meet his criteria for value and price. We believe that he is also getting ready for the next recession and market correction or crash.

Silent Warning for Investors

The man who is perhaps the greatest investor ever is silent and that should concern investors. Warren Buffett is the prime example of a long term, buy and hold investor who totally believes in the power of the US economy and the US stock market to grow wealth. Buffett’s net wealth was about $10,000 in the middle of the 20th century and today he vies with Jeff Bezos and Bill Gates for the title of the richest person in the world with more than $80 Billion in net wealth. Buffet would, in fact, be the richest person if he had not given away $34.5 Billion over the last few years! And, Buffett has made his money by applying the concept of intrinsic stock value. He looks for companies with the potential to grow and reliably produce income year after year. And, he looks for companies that are underpriced. Thus, over the years, Buffett has always been making investments and now he is not! We should pay attention to this silent warning for investors as it has implications for all of us.

Should You Hold Your Investments Forever, or Not?

Buffett has been quoted as saying that when he purchases stock in a strong company with strong management that favorite length of time to hold that investment is forever. And now, according to the most recent Berkshire Hathaway quarterly report, they are holding $122 Billion in cash while in normal times they would be holding something like $30 Billion. This is because in almost four years Berkshire Hathaway has not made any major stock purchases or acquisitions. And, in the first two quarters of this year, Buffett has be a net seller of stocks. The two parts of intrinsic stock value are the likelihood of a stock making money over the years and the current price of the stock, or any investment. What is happening with Buffett’s company is that they are not seeing any investments these days that combine growth and money-making potential with reasonable or low prices. This is the silent warning for investors.

Why Is Buffett Not Buying Back as Much Berkshire Hathaway Stock?

A third piece of the silent warning for investors is that Berkshire Hathaway has reduced its stock buybacks as well. Buying back your stock is done to increase share price and put excess cash to the best use possible. According to company reports, stock buybacks went from $1.7 Billion in the first quarter to $400 Million in the second quarter. We recently wrote about the potential dangers of stock buybacks. In the case of Berkshire Hathaway, the company has not been trying to artificially raise its share price and has rather been putting its cash to the best use. The fact that they are now keeping a large hoard of cash implies that the “better use” of this money will be in invest in the near future after a substantial market correction or even a crash. The likelihood of the trade war becoming permanent is such that smart investors will do well to hold a large amount of their portfolio in cash until the future becomes clearer and until the prices for stocks and other investments become more realistic.


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