We are now sitting at the low yield for the current 10 year Treasury at 1.51%. The high yield has been 1.936% on December 23, 2019. The average yield, according to Bloomberg data, has been 1.805%. An outbreak on the downside could be imminent, especially if the Chinese economic slide worsens, because of the Coronavirus. We continue to inhabit the “Borrower’s Paradise” where it is “Money for nothing” and “Checks for free.”
The yield curve is flat as a pancake with a slight inversion. The 3 month Bill yields 1.54%, the two year Treasury is at 1.313% and the five year at exactly the same level. Bloomberg’s American corporate bond index is only 109 basis points higher than their Treasury index which is quite telling. In my mind, this means that the “hunt for yield” is so pervasive that “credit risk” has been minimized to an extreme level. Even Bloomberg’s high yield index, now pegged at 5.517%, is only 402 basis points off Treasuries and only 294 basis points off the corporate index. Anything with a yield is now getting snagged, especially after the carnage in the equity markets that has taken place recently.
The one factor that is in the process of changing, in my view, is money coming out of bonds, because of the low “Absolute Yield” and going into equities as an alternative. The “Appreciation Strategy” worked very well last year but I think it has run its course. Now it is insurance companies, seniors, retirees, pension funds, and the like, that are truly behind the eight ball as the corner has been turned.
What to do? What to do?
My viewpoint has been consistent since the end of last year. “Take some profits,” I have said any number of times. Last year was a spectacular year for equities and to not “lock-in” some of your profits was a mistake. Well, the proof has been in the pudding recently and things could get worse in equities depending upon how our new viral epidemic affects the world’s economies and the markets, as a result. I am not predicting a blood bath, but I am predicting a bloodletting.
Anyone who was alive during the outbreak of the bubonic plague in the 14th century experienced something terrifyingly close to the widespread death and chaos of an apocalyptic event.
The medical issues here are but one aspect of the problem. The other is the significant impact that this virus could have on the economies of the world and especially on the Chinese economy. The devastation here is quite real and it is affecting the travel business in a very significant fashion. Whether it is the casinos in China, the airline industry, ocean cruise lines, river cruise lines, or any place where there is a large gathering of people, the scare is on. You just don’t know where you might get exposed. To be quite forthright, I expect the situation to worsen as the virus spreads its ugly wings.
Then there is the question of the consumers in China. Who is going to rush about and buy luxury items, and brands, when the people are afraid of a serious health exposure. We will probably never know the truth, but the Chinese economy could be in for some real trouble. It could go from ugly to uglier, and maybe even worse than that.
In a novel manner, the Coronavirus has “Trumped,” so to speak, the American tariffs. Who is going to open a business in China now, manufacture in China, or buy Chinese goods when you don’t know who, or what, might be infected.
We are but days away now from the vote. It seems highly unlikely that President Trump is going to be convicted. After all of the name calling, accusations, and hate speeches, we will finally be getting a ruling, probably on Wednesday. I make no political comments here, but I think when all is said and done that the markets may get a “sigh of relief” that the whole process is finally over. “Begone,” I say, and “Good riddance.”
My summation here is that we could be in for some trouble. Grant’s Rules, 1-10, still apply. “Preservation of Capital” is going to sit high in the rafters, this week, as these scenarios play themselves out. I would have some cash in your wallet now, and a little patience, to wait for some opportunities to present themselves. The time will come, I assure you. It just isn’t here quite yet.
I keep six honest serving men (they taught me all I knew)
Their names are What and Why and When and How and Where and Who.
– Rudyard Kipling
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.