Over the Christmas holiday, while hopefully no one was watching, the Italian government organized a ‘bail-in’ of the country’s third largest bank, Monte dei Paschi (MPS), which stood on the edge of insolvency and illiquidity. There are three things you need to know about this deal:
While everyone else is fixated on the U.S. stock market, I’m watching something more important…credit markets…because that’s where the next big thing is coming from.
Over the last week, another of those issues that no one seems to care about has worsened: the bloodbath in Chinese bonds. Last night, futures plunged back to last week’s lows overnight amid liquidity fears (with short-term lending rates inverting, rising above longer rates) and growing anxiety over China’s unprecedented debt load.
Does a Fed rate hike mean that you should sell gold? Not if history means anything. The rate hike is fully priced in. But that’s not all.
Every investor has to make their own decisions. In my view, this is a good time to consider buying gold. There may be more downside but, to me, the risks are to the upside. Given what’s happening in this world, you probably should own more gold at these levels.
So, Renzi lost his referendum on Sunday, he resigned as Prime Minister and his government is in limbo. The often-delayed private capital refinancing of Italy’s most troubled large bank, Monti di Paschi, has apparently gone into limbo as well. Surely the European banking system was crushed yesterday in the stock market and the euro was pummelled while the dollar soared? None of the above, dear reader. But be patient.
DoubleLine Capital’s Jeffrey Gundlach, who predicted the Donald Trump victory, nailed the upturn in US Treasury yields and called the post-Trump market rally, has now changed directions according to media reports today; he is no longer exuberant about the impact of Trumponomics.
The memo that all is well with the world under a Trump presidency has not been received everywhere, it seems. Risks are on the rise, perhaps nowhere more acutely than in Italy.
I have just finished reading an economist’s projection of 5% real growth in the U.S. economy for next year. Amazing. The optimism stems from a belief that a new administration will be able to dramatically (and immediately) increase economic growth. The problem is that the U.S. and global economy continue to face major structural issues—too much debt, an aging population, declining productivity and a slowing global economy–that are beyond the control of any politician.
The markets seem to think so. Here’s what hundreds of bullish analysts are saying: the price-to-earnings ratio (P/E ratio) is roughly 20 today and they are projecting earnings to grow an astounding 30% by the end of 2017. Therefore, a forecast of 2500 on the S&P is not unreasonable. And so you get a lot of predictions of a big S&P 500 bull market in 2017.