I’m not going to do the most obvious thing to do when markets get rattled.
I’m not going to claim to know why, though I have my own strong opinions. You’ve heard from plenty of talking heads doing this, no doubt.
Both those who claim to know what triggered the sell-off and those pointing out that all of the things being cited as the cause have been with us for months, if not years, are a dime a dozen right now.
Figuring out who is right is pretty useless. It won’t do us much good for guidance going forward.
The simple fact is that something set off traders and algorithms enough to start a feedback loop. Money, smart or dumb, started following the rest of the money.
That phenomena is as old as markets themselves, and is woefully unpredictable.
Instead of all that noise, what I want to do today is point out a couple things that are going on right now in the markets that you can consider while deciding what to do going forward.
Money Coming Home
There is no perfect way to measure this, but it appears that the Republican tax plan, or the 2017 Tax Cuts and Jobs Act to be precise, is working wonderfully in one of its intended goals.
A whole lot of money is coming in from offshore corporate accounts.
The dividends paid by foreign affiliates of U.S. corporations to their parent companies have grown 5.6 times over in a six-month period. $464 billion came back in the first half of 2018 as compared to $82 billion in the second half of 2017.
Add that to the fact that share buybacks are soaring and may very well hit $1 trillion this year. Check out this chart from Yardeni Research:
This is great news for the U.S. and the stock market as a whole. That’s a whole lot of buying pressure bidding up share prices.
We’ve certainly seen the results this year, though the correction erased all but about 2.5% and 1.3% of the year-to-date gains in the S&P 500 and Dow, respectively.
So what is offsetting this wave of investment? That would be the growth void we’re facing in the near future.
Filling The Void
Credit, in all of its forms, is essentially a time traveling money trick. If you want today’s money to be available in the future, you lend. If you want tomorrow’s money today, you borrow. The risk involved is offset by interest.
Borrowing creates or accelerates economic growth. Economists will fight about the nitty-gritty of how well it really creates growth and the optimal ways to do this to make meaningful growth until there are no longer any economists, for one reason or another.
But there is an accepted truth that at some point, you simply borrow too much from the future and it creates a sort of impending growth void.
The payments a borrower agreed to in the past come due, and there is less money to do what it wants to do now without borrowing more or tightening its belt and living without more growth.
Anyone talking about credit risk, or the effect of Fed policy on markets, is essentially talking about how it is hard to figure out a balance between growth now and growth going forward.
We’ve seen a whole lot of corporations borrowing more and more for years now. Even while repatriating vast sums of money, they’re borrowing more now than ever.
The lesser growth that high debt levels and rising interest rates causes makes the companies riskier to lend to, making yields go up further, and creating a feedback loop.
That void in growth that is coming is increasingly obvious and coming closer and closer, day by day. We’re going to have to start living with less growth.
Where To Go?
For whatever reason why it started now, investors are rightfully worried about where they can park their money and aren’t finding many easy answers.
Corporations will have lower profit margins and will have to use repatriated money to cover the cost of servicing debt.
The U.S. markets have high valuations across the board and the threat of lower economic growth and a bear market makes them pretty scary right now.
Parking money in bonds while interest rates are going up means either making a long-haul investment at a risky time or a speculative bet that rates will stabilize. Bonds and speculation aren’t a good mix for most investors.
Then there are emerging markets. They face all the same threats as U.S. markets while corporate and investor funds flow away from them.
There are no easy answers for what you should do, but one of the best options available is to make sure you have some exposure to gold miners.
Commodity stocks, including gold, are at very low relative valuations and gold provides a hedge against currency and debt concerns. Plus it is a sector of the market that saw debt fall while the rest of the market drove borrowing to record levels.
Check out this one-month chart to see how some investors made some quick gains while the broader markets fell:
Volatile and bearish markets will only see more inflows into this largely ignored sector. The longer this continues — and it may be on and off for months or years to come — the better these investments will become.
