Wednesday, May 18, 2016

Your Stream Could Turn Dry

- "You will end up in poverty if you lend money, and receive less than your principle in return."

- Sebastian

If you subtract the real inflation rate from the yield of the ten year treasury bill, we are already under negative rates. It could get worse. The trend is down because the Fed is creating deflation by shrinking interest rates. They claim a 2% target for inflation, but everything that they do obstructs the possibility. Personally, I would rather see stable prices and no inflation with social mobility alive and kicking. However, that is another story for another time.
10-Year Note
I will use the classic 10-year denomination because it is generally viewed as the benchmark both for shorter and longer issues. When you scan down the list, you will notice the hypocrisy in all the issues. Some issues offer a vastly higher rate, but you have to consider both the risk, currency exchange and historical inflation within that nation. In any event, in the US, the return of 1.75% for a ten year period is a basic lie. There has never been a period in our history of a ten year duration that prices in the first year was less than 1.75% after ten years! Dear reader, keep in mind that an investor is suppose to make a profit for the time use of his money. Our Treasury is saying, if you buy a ten year note at 1.75%, then in ten years you should see a profit. Get out of town! Anyway, the story is worse in Europe and Asia.
Country                Rate                                           Trend
US                        1.75%              This is down 50 basis points for year-over-year(YOY)
Canada                 1.31%              This is down 48 basis points/YOY
Germany              0.12%              This is down 55 basis points/ YOY
UK                       1.40%              This is down 56 basis points/ YOY
Switzerland          -0.35%             This is down 42 basis points/ YOY
Japan                    -0.13%             This is down 57 basis points/YOY
If you believe the narrative, India offers the best return
India                     7.42%               This is down 52 basis points/ YOY
Did you notice the insipid intrusion of negative rates? This is a scary trend that all nations are embracing. People, central banks are causing deflation by lowering the value of money. This is a destructive principle. This disease has spilled over into the private sector.
Dividends and Investors
Americans, usually like stable, large companies that pay a good dividend. Companies like J&J and oil giants, Exxon and Chevron. In Europe, investors like their large blue chips like Royal Dutch Shell PLC or Siemens AG. Dear reader, those last two had their bonds fall negative in April. Their principle is decreasing! According to Bloomberg, another $16B of euro-corporate bonds are trading with yields below zero...Idiots!
Back in the US, the current yield for dividend paying companies in the S&P 500 is 2.1%. This is less than the historic average, but it is 1.8% more than the 10-Year Treasury. Of course, the Fed's cheap money allows companies to buyback their stock. Not that this will capture a future sales explosion by the company, but it makes the quarterly report look better and the CEO makes more with his stock options...Crooks!
Last year, companies in the S&P 500 spent almost $1 trillion on buybacks and dividends. However, it is the dividend aspect that worries me. By the way, that total spent is greater than the total profits of the same S&P 500 companies. People, simple math tells you as you well know, you cannot keep spending more than you make. Something has to give. It points to the dividends. A trend is already in motion.
Last year, nearly 400 companies cut their dividend. By the end of April of this year, there are 213 cuts. At this rate, 2016 should see 639 - maybe one of yours? Keep in mind, that estimate if reached, will crush the previous record of 527 back in the financial crisis of 2009. My suggestion is never take a dividend, but reinvest it in the same company. Eventually, you will have enough free shares so that you can sell your original purchase shares and let your "free" shares grow even if they cut their dividend.
In discloser, I use that same investment plan with Silver Wheaton. Peace, out!