Out of the Box: Preservation of Capital

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The first ten, of Grant’s Rules, are “Preservation of Capital,” reiterated ten times. The reason for my thinking here is that it is far easier, and more important, to keep your hard-earned money, rather than make new money. Here is what happens if a stock, or the overall market, declines. Speculation has its place in investing but there are also associated risks.

Recovering from a 20% loss requires a 25% gain
Recovering from a 30% loss requires a 43% gain
Recovering from a 40% loss requires a 67% gain
Recovering from a 50% loss requires a 100% gain
Recovering from a 60% loss requires a 150% gain
-Courtesy of my friend John Mauldin, Mauldin Economics

With the Fed lowering rates, without the Fed lowering rates, it is my opinion that American yields are heading lower as we are virtually the last man standing, of any major market, with positive yields. This has not changed since the recent ECB meeting. Even with the 10-year Treasury backing up 34 basis points, last week, to 1.90%, this has not changed.

As a matter of fact, during the last three months, the Bloomberg Treasury Index is still up 1.46%. This is as the American Bloomberg Corporate Index is up 2.96% and the American Bloomberg High Yield Index is still up 2.43% as of last Friday’s close, for the same time period.

Talk to almost any international money manager and you will find that European money is rapidly finding its way across the Pond. Even with our recent back-up in yields, in my estimation, the slug of new corporate deals will continue. Investment Grade, or High Yield, and everyone is beginning to gear up to re-finance, tender, re-negotiate bank loans, call what can be called, as we are still in a “Borrower’s Paradise.”

This is also a boom time for individual borrowers as mortgage rates drop, equity loans fall, margin rates decline, and Nirvana is raining down from Heaven. With the Fed likely to do a “something,” at their next meeting, with some kind of announcement on September 18, this experience will likely widen and continue. First, however, we had the ECB’s meeting and their announcements.

The nations of the European Union still cannot afford their current budgets, it is as simple as that, and so they have mandated their central bank, who has no “Independence,” to keep lowering rates, as a better option, which is exactly what they did along with restarting their Quantitative Easing program at $22 billion a month. They continue their path down the “Rabbit Hole” that will take decades, if ever, to get out of, in my opinion.

We are still in “Wonderland!” It is just that the “Tea Party” was not as large as expected. Ah well, Alice and the Mad Hatter are still seated, at the table.

For fixed-income investors, we are still in the “season of darkness” with very low yields, or no yields, or negative yields, fanned out across the planet and the cries for, “Help,” have only just begun, in my estimation. The “Boom” for borrowers is the “Bust” for those that live off of their cash flows and this has barely changed with our slight back-up in yields either. This effected group includes retirees, seniors, insurance companies, money managers, banks, mortgage companies, and any other individuals, or corporations, that live off of their incomes.

In the first instance it was helpful for the equity markets, and the Real Estate markets but, as we approached Zero yields, lower rates won’t move the needle anymore, and then I expect either a stand-still, the better alternative, or a reversal, which could be painful, in these markets. We may, I point out, be at the beginning of some type of reversal.

There is also a price, to be paid, that I foresee coming in the currency markets, as the negatively yielding debt finally wakes up people to the realities of various economies. “Currency Wars” are on the way, in my view, and it will be a global event as the United States and the EU and China scramble for position.

Here’s the upcoming U.S. economic calendar:
Sept. 16: Empire manufacturing.
Sept. 17: Industrial/manufacturing production and capacity utilization; NAHB Housing market index; Treasury International Capital flows.
Sept. 18: MBA Mortgage applications; building permits; housing starts; FOMC rate decision.
Sept. 19: Current account balance; Philadelphia Fed business optimism; initial jobless claims; Bloomberg consumer comfort; leading index; existing home sales.
Sept 20: Household change in net worth.

“The first rule of investment is don’t lose money. And the second rule of investment is don’t forget the first rule. And that’s all the rules there are.”
-Warren Buffett

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities. Redistribution/reproduction of this material is prohibited. See additional disclosures at: http://brileyfbr.com/legal/legal_disclosures

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