What to Buy — and Sell — as “Foie Gras” Policy Fails

Mike Larson | Friday, April 8, 2016 at 7:30 am

I’ve never eaten foie gras. I know it’s supposed to be delicious. But it’s also one of the most controversial foods around. That’s because producing it involves a process called “gavage,” whereby the duck or goose is force-fed massive amounts of food to fatten it up and cause the size of its liver to balloon.

Why do I bring this up? Because force-feeding is exactly what global monetary policymakers are doing on a massive scale.
They’re using cheap liquidity rather than buckets full of corn. But the result is the same: They’re giving several parts of the capital markets indigestion, as well as causing massive distortions. And they aren’t accomplishing anything useful for the real economy, either.

The good news for you? You can take advantage of these “foie gras” policies to generate hefty profits — IF you know what to buy and sell. So let me give you a quick primer on what I’m recommending …
BUYS: My favorite stocks are “safe yield” names, companies in non-economically sensitive, lower-volatility, higher-yield sectors. Think consumer staples, utilities, telecommunications services, and similar names.
Yes, they’re extended in the near-term. So you have to do your best to buy on corrections. But since I got my Safe Money Report subscribers into many of these names several months ago before they started surging, I’m confident they’re pleased with the results.
I also like lower-risk debt securities — government notes and bonds issued by lower-risk countries — for a trade. Because of the fundamental health of their balance sheets and the wonderful policies their governments are enacting? Heck no! Instead, it’s because “foie gras” policies are backfiring. They’re raising deflation, rather than inflation, fears … crushing global yield curves … and hollowing out the lending business and financial stocks worldwide.
German 10-year notes just sank to 0.08% yesterday, a fraction above their all-time low. U.S. bond yields have been falling for months on end, contradicting the happy talk about stock averages. And the yield on Bank of America’s Global Broad Market Index just sank to 1.3% – the lowest level in the 20-year history of the index. Around one-third of ALL government bonds in the developed world actually yield less than zero now.
I also like select “risk-off” currencies. Think the Japanese yen, the Swiss franc, and so on. They’ve been on fire lately, a boon to my subscribers, who received recommendations to buy them months ago. But given how late we are in the credit cycle … and how ineffective the “foie gras” policies the central banks in those countries are pursuing … I believe they have further to run over time.

Gold is a solid asset to own in a “foie gras” policy world.

Gold is another solid asset to own in a “foie gras” policy world. After all, the 0% yield of a bar of bullion certainly beats the negative yield that trillions of dollars’ worth of bonds are “paying” now.
The recent surge in gold and gold-mining shares — and how you can profit — will be a key area of focus for my fellow experts and me on the 2016 Money, Metals, & Mining Cruise. It sails from Anchorage to Vancouver this July 10-17, with several port stops along the way. Give my team a call at 800-797-9519, or click here, for more information.
SELLS: Buying yield in safety stocks today is one thing. Chasing yield in investments like junk bonds or economically levered stocks is another, considering how late we are in the credit cycle.
I’m constantly amazed at how many people on Wall Street simply don’t understand how the cycle works. That’s despite the fact we’ve seen multiple, huge boom-bust cycles in the past 20 years.
Why are these kinds of investments so dangerous now? Because corporate borrowers are overloaded with debt in relation to their assets after years of binging on borrowing. One portfolio manager put it this way: “We’ve had more corporate debt than ever, and more leverage than ever, which increases the potential for greater pain.”
Consider the following stats:
A) Companies with junk ratings are now carrying debt equal to 48% of their assets. That’s a jump of 7.5 percentage points in just the past few years.
B) Default rates have already risen to 4%. But they could climb well into the double digits as the credit cycle turns, according to Moody’s Investors Service.
C) Recovery rates are also sinking fast. Corporate bond investors could expect to get back about 44 cents on the dollar through the default/bankruptcy cleanup process a few years ago. That has already plunged to 29 cents, and the trend will only get worse with time.
So all of the companies that loaded up their balance sheets with debt to buy back loads of stock or pursue multibillion-dollar mergers? Sell the heck out of them!
The same goes for companies in sectors vulnerable to late-cycle chaos, including industrials, transportation names, technology stocks, and especially financials. Or better yet, use specialized investments like unleveraged and leveraged inverse ETFs — or put options — to rack up hefty profits as their shares decline.
Bottom line? I think the “foie gras” policies we’re seeing all over the world are ridiculous. They’re clearly failing at their primary objectives of boosting inflation and growth, and they’re spreading indigestion everywhere. But rather than just lament this state of affairs, I recommend you capitalize on it by using the buy and sell guidance I’m sharing here.
Until next time,
Mike Larson
Mike Larson gr