“With Interest Rates This Low, There Are Bound to Be Accidents…”

Submitted by William Bonner, Chairman – Bonner & Partners

The World of Money Has Become a Joke

RHODES, Greece – We have been writing about radical ways to reduce your living costs. Our monthly budget was $500. We were just fantasizing about it. But judging from all the feedback we’ve received, many Diary readers have done it!

Interestingly, many of those who reported living on little money report that it was the happiest time of their lives! Right now, your editor is spending considerably more than $500 a month.

He is sitting on the balcony of his cabin on the luxurious Crystal Serenity cruise ship, overlooking the harbor at Rhodes. (Cruise ships aren’t usually our thing. But we were invited on board to speak at the second annual Money Week “Cruise for Investors.”)

ephesus_16Arriving at Ephesus …

Photo via ephesusgrouptours.com

To our right is where one of the Seven Wonders of the World, the Colossus of Rhodes, once stood – a huge bronze statue of the titan god of the sun, Helios.

The people of Rhodes built it to celebrate their victory over the ruler of Cyprus, Antigonus the One-Eyed, one of Alexander the Great’s former generals.

The Colossus stood for 54 years, before an earthquake toppled it in 226 B.C. Four centuries later, an Arab force, under the Muslim caliph Muawiyah I, captured Rhodes… had the toppled statue disassembled… and sold the bronze to a Jewish merchant.

It was said that there was so much bronze it had to be loaded on 900 camels.

antigonus_i_monophthalmus.1jpgAntigonus Monophthalmus (the One-Eyed) taking aim in Oliver Stone’s movie “Alexander”. Insert: actual mug-shot of Antigonus on one of his coins. The former general of Alexander commanded the most successful of the successor armies after his chief’s death; if not for his advanced age, he may well have succeeded in restoring Alexander’s empire. He died in the battle of Ipsos in 301 BC, after the other dynasties led by Cassander, Seleucus, Lysimachus and Ptolemy, worried by his success, united against him (he had Cassander and Seleucus on the ropes at the time, having driven the latter out of Babylon). How many other 81-year old generals have died in battle? Cassander’s father was a guy named Antipater (the regent of Macedonia and Alexander’s “official” successor), so we naturally side with old One-Eye. An interesting aside: Antigonus liberated the city of Miletus and ordered the restoration of democracy there (albeit of the patriarchal sort, as was customary at the time).

Image via detectivesdelahistoria.es

But we will spare you the history and return to our subject: farce. Yes, the world of money has become a joke. On Friday, the Dow crossed back above the 17,000 mark. What? Is the correction over? Is it clear sailing… all the way to 20,000… and the moon?

On the deck below our balcony, fellow travelers get exercise by walking around the ship. Hark! We recognize a voice…

“Well, with interest rates this low…” said the familiar voice. It was Tim Price, a professional investment manager and colleague from our London office. Tim was walking around the deck, talking to a friend. It took a few minutes to complete the circuit. So, we only caught little snippets of his conversation…

DJIADJIA, daily. Note the declining volume during the recent advance. If one looks at an hourly chart of the move off the August 24 low, it looks like a complex corrective wave so far. It could be wave 2 (or wave 4 of one lesser degree) – click to enlarge.

“One of the hardest things to understand…” was the phrase we picked up on his second lap.

“Of course, we have no idea when that will happen…” was the remark on lap No 3.

Like archaeologists reassembling an ancient pot, we will have to fill in the missing parts.

“With interest rates this low, every asset price is suspect,” he might have been saying. Or: “With interest rates this low, there are bound to be accidents.”

False Signals

Ultra-low interest rates are like highway signs that have been tampered with by a mischievous troublemaker: They send drivers in the wrong direction. Soon, there is a pileup.

Right now, for example, Deutsche Bank is warning about a huge accident in corporate debt. Corporations have been able to borrow hundreds of billions of dollars at some of the lowest interest rates ever.

There is now $4 trillion in U.S. corporate debt maturing over the next five years. Some of them used the money to good purpose – building factories and developing new capacity to boost output. With that new output they will be able to increase sales and repay their loans.

LQD and JNKThe pure price charts of LQD and JNK (excluding dividend returns), weekly, over the past 5 years. It is clear that JNK looks atrocious, but the technical picture of LQD is in some ways even more worrisome. It seems to have built a bearish flag/wedge following its decline from the early 2015 peak, which is usually regarded as a continuation formation. Why would high grade corporate debt look technically dubious? Either the market expects higher rates, or it expects a deterioration in credit quality, or both – click to enlarge.

But the signs misled the bad as well as the good. Many corporations took the money simply because it was made available to them at such low cost. Then they distributed it to corporate managers and shareholders – by way of dividend payments and share buybacks.

And now, with consumer prices and world trade in decline, the question is whether they’ll be able to service the debt. As long as interest rates remain ultra-low, they may be able to roll over their debt. (They’ll be able to borrow more to pay down their existing loans.)

But interest rates – like every other price – go up as well as down. When interest rates go up, the pavement gets slick and the ambulance sirens scream. As Tim said, “Of course, we have no idea when that will happen.”

But we have to stop. It’s time to go ashore. Until next time…

Addendum by PT: More on Antigonus the One-Eyed

antigonus in action

Unfortunately there aren’t many contemporary depictions of Antigonus (382 BC- 301 BC, also known for a while as Philip II, son of Philip of Elimeia). A major figure in the war of Alexander’s successors (the diadochs), he declared himself king in 306 BC, relatively late in his illustrious career and established the Antigonid dynasty. We were unable to find a bust, whereas his son Demetrius – a renowned field marshal in his own right – was apparently thought bust-worthy. Anyway, most of the time, Antigonus was found in the thick of battle somewhere, so it is no surprise that what depictions of him exist show him trading blows with his enemies (mainly with him in the process of dishing it out, although he ultimately did fall in battle himself).

DiadochA map showing the political situation during the era of the Diadochs, who declared their independence after Alexander’s death and immediately started to fight over the territories once controlled by the latter. It was a complex back and forth, with alliances frequently changing, depending on the perceived needs of the moment. Antigonus was quite successful; several of the more light-weight ex-Alexander generals were soundly beaten by him and he encroached on the territories of the big ones, giving them reason to fear him. However, when the other diadochs eventually united against him, he was forced to fight on several fronts, a big strategic disadvantage (note the location of his kingdom, surrounded by those of his rivals) – click to enlarge.