HOG Slaughter

Column #372     October 14, 2022

What’s the relevancy? Well . . . stress has a big impact on health and well-being. Valerie Soleil says that “Nearly 80 percent of adults in the United States report experiencing stress so severe that it causes physical symptoms. Almost half say it has had a negative impact on both their professional and personal lives.” A statement from the American Psychological Association says that “Reducing your stress levels cannot only make you feel better right now, but may also protect your long-term health.”^{1 2}

None of us are going to have a stress-free life. Every day we’re confronted with multiple challenges, such as meeting deadlines, paying bills, juggling childcare, determining what to eat and preparing it, meeting new people, grocery shopping, and worrying about our investments, all of which make our bodies react the same way. The reaction is a “fight or flight” response—and it can end up being stuck in the on position.

Lowering our stress levels is of paramount importance. But it won’t happen if we’re always surprised and caught off guard. So knowledge and preparation are our best defense. Quite often, once you’ve experienced an event there’s less stress the next time around. So, just like we want to be proactive about our health when it comes to food, we want to be proactive about as many other events as possible.

There are some events that are always stressful. For instance, it doesn’t matter how often you hear a tornado warning, your anxiety rockets up almost instantly when the warning is sounded. Hurricane warnings always cause stress, but the buildup occurs overtime and only rockets higher when you realize your area is where it will make a landfall. There’s other highly stressful events that also have warnings. Unfortunately they are usually ignored. One example that stands out is stock market crashes and economic depressions.

The really significant market crashes and depressions can have 35-year cycles. So a lot of complacency develops in-between events. Emotionally, people are ecstatic when financial asset prices are peaking. Then as the bear market gets underway the usual reaction is that it’s just a correction that won’t last long and it’s viewed as an opportunity. Then, as the bear progresses down a leg at a time, people start to worry to have their concerns quickly evaporate during each upside rally. There’s a saying that bear market action tends to keep people invested while bull market action tends to scare them out.

Only after stocks have cratered to unfathomable lows do investors really get scared, stressed to the max, and consider selling in order to relieve the stress. They understand the problem after the crash because business conditions are deteriorating, cash reserves are low, job security is precarious, and portfolios are only worth a fraction of what they were at the peak. And, since really big supercycle bear markets can take 30 months and longer to unfold, their concerns have been building for months which tend to compound the stress levels.

Because supercycle bear markets are bad for business generally, they’re not usually forecasted by Wall Street. Nor do professional money managers position their clients for them by moving them to cash. That’s why recently I’ve been writing about money, credit, and markets starting with “What is Money?” back on May 28, 2021. At that time a major top in the market was starting to form. The prices of many of the highly speculative meme stocks had lost their upside momentum. May is when price inflation first roared up out of control and interest rates had already increased off their historic lows. In other words, many red lights were beginning to flash.³

I put out another money theme column in August 2021 titled “Nixon: Incompetent Politician.” Then I wrote “The Modern-Day Pet Rock” on December 3, 2021 which predicted a collapse in the price of Bitcoin. Bitcoin’s high that day was $57,652. Now it’s struggling to stay above $19,000 and is still far from what will eventually be its bottom. Since then I’ve written many more columns regarding financial markets and customers are wondering why these columns are featured in a newsletter about grass-fed meat.^{4 5 6 7}

Well, if you want to keep stress to a minimum, knowing what may be on the horizon gives you an opportunity to prepare. So just like eating proactively, wearing a seat belt in a car, or wearing a helmet when riding a bike, selling assets and holding cash can be very comforting while the environment is risky for holding assets.

Of course, everyone doesn’t want to miss out on the next bull market, but riding a supercycle bear market is nothing like the brief stock market correction we had when the COVID-19 shutdown occurred. When it comes to supercycles bear markets can last for decades. Do you remember when Japan’s Nikkei Stock Index peaked at 38920.38 on December 1, 1989? The Japanese were on a roll and could do no wrong. Then a bear market set in and it bottomed at 6971.00 on March, 2009—down 82.1%. The Nikkei Index recovered since then setting a recovery high of 30839.49 on September 1, 2021—still down 20.8% from a high it set 32 years earlier—and they aren’t out of the woods yet.⁸

Following the supercycle peak in asset values the beginning of this year, we too may have many more months where preservation of capital (sitting in cash) can be most rewarding. That’s because as inflation continues, interest rates will stay high or move even higher causing serious problems for America’s primary debtors—the Federal government, corporate borrows, and consumers. Some savvy credit analysts predict that in the Federal Reserve Bank’s (Fed) battle to rein in inflation up to 40% of the lowest-rated corporate borrowers will default. But all companies, even those of investment-grade credits will suffer—especially if there is a recession. Of course, when countries and corporations start defaulting price inflation quickly turns into deflation where cash will shine!⁹

Two weeks ago Great Britain’s bond market nearly imploded. It caused England’s central bank to step in with emergency funding to save the country’s pension industry from literally collapsing overnight. The problem was caused by increasing interest rates. For the past three years the pension companies had been borrowing money in the short-term market at near zero interest. Then they invested that borrowed money in long-term bonds that paid 1% interest. This arbitrage tactic allowed them to continue to meet their pension obligations.

But, this year as interest rates increased to 4% in the struggle to stop runaway inflation, the longer-term bonds plunged in price and interest expenses on short-term debts jumped dramatically. The result was the pension companies saw their interest expenses soar while their bond portfolios were crushed—putting them in a classic Catch 22 situation with no way out. Almost overnight all pension companies were upside down! If interest rates fall, inflation explodes much worse. If interest rates go higher, the pension companies can’t be saved.

A week or so ago Porter & Company Research published a fascinating report about the pickle many companies found themselves in because they had borrowed money to buy their own shares. Porter’s example was the “iconic American motorcycle manufacturer, Harley Davidson.” Its stock symbol is HOG.¹⁰

For years HOG had been raising money by issuing long-term bonds at low interest rates in order to buy their own shares—reducing the number of shares outstanding from 294 million in 2004 to 144 million today. This “trick” of getting almost free money to buy their own shares permitted HOG to report higher earnings PER OUTSTANDING SHARE. This masked the fact that their gross earnings were in decline! In 2004 HOG’s balance sheet showed a net cash position. Since then HOG accumulated more than $5 billion in net new borrowings and now the cost of that money is on the rise.

Porter concluded that: “Now, the company finds itself leveraged up with net debt exceeding five times annual operating income. And over the next three years, the company faces nearly $3 billion in debt maturities, including nearly $1 billion next year alone. Refinancing those bonds—at much higher rates—will spike the company’s interest costs. Meanwhile, factor in a potential hit to demand from a recession … and this HOG could get taken out to pasture.”

The really alarming point is that HOG is just one of many companies that is facing some tremendous headwinds because they embraced cheap debt and bought their shares in order to make their earnings per share look better. These managements focused on the stock price in the short-term and forgot about focusing on their businesses. In so doing, not only did HOG’s management put their company and all their employees’ jobs in jeopardy in an attempt to manipulate a higher stock price—many other companies did the same thing.

So, what are the odds of a recession? Ryan McMaken from the Mises Institute puts the odds at a near certainty. Historically, when the M2 money supply shrinks, a recession follows. To slow the pace of inflation our central bank (the Fed) is doing all it can to rein in the growth of M2 and bring price inflation down to what they consider to be a prudent, honest, stable, and justifiable 2% per annum rate of depreciation. (Of course, a 2% debasement “goal” for “money” is a despicable goal in that it is far from absolute stability which was the Fed’s original mandate.)¹¹

So far, in terms of shrinking the M2 money supply the Fed is succeeding. Ryan states that: “During the thirteen months between April 2020 and April 2021, money supply growth in the United States often climbed above 35% year over year, well above even the “high” levels experienced from 2009 to 2013. During August 2022, year-over-year (YOY) growth in the money supply was at 4.35%. That's down from July's rate of 4.84%, and down from August 2021's rate of 8.28%. The growth rate peaked in February 2021 at 23.12%.” He concludes that it’s likely we are already in a recession and it won’t get better soon.

This past Monday JP Morgan’s CEO Jamie Dimon agreed. “He warned that a ‘very, very serious’ mix of headwinds was likely to tip both the U.S. and global economy into recession by the middle of next year.”¹²

These pointers are just a few of the reasons why this is a good time to understand what is happening out there and become more proactive regarding asset holdings. Being in cash for the next 18 months or so while the Fed fights inflation is just one less thing to worry about. When you have cash, you have options. For certain, in the years ahead there will be many opportunities to take advantage of the silliness the debt binge spawned during the past 40 years. But if your investments go underwater along with everyone else, you’ll be in the same boat as HOG and the pension industry.¹³

Cash can be a stress reliever.

To your health.

Ted Slanker

Ted Slanker has been reporting on the fundamentals of nutritional research in publications, television and radio appearances, and at conferences since 1999. He condenses complex studies into the basics required for health and well-being. His eBook, The Real Diet of Man, is available online.

Don't miss these links for additional reading:

1. The Effects of Stress on Your Health and Well-Being: What You Need to Know by Valerie Soleil, B.A., LL.B. from Life Advancer

2. How Stress Affects Your Health by David S. Krantz, PhD, Beverly Thorn, PhD, and Janice Kiecolt-Glaser, PhD from American Psychological Association

3. 12-Month Percentage Change, Consumer Price Index from US Bureau of Labor Statistics

4. What is Money? by Ted Slanker

5. Nixon: Incompetent Politician by Ted Slanker

6. The Modern-Day Pet Rock by Ted Slanker

7. Grand Supercycle Bear Market by Ted Slanker

8. Nikkei 225 Index - 67 Year Historical Chart Closing Prices log scale and linear scale

9. Hold'em or Fold'em by Ted Slanker

10. This Hog Will Be Slaughtered In The Corporate Debt Bubble by Porter & Company Research from Zerohedge

11. In Latest Recession Signal, Money-Supply Growth Plummeted to a Three-Year Low in August by Ryan McMaken from Mises Institute

12. ‘This Is Serious’: JP Morgan’s Jamie Dimon Warns U.S. Likely to Tip into Recession in 6 to 9 Months by Sam Meredith from CNBC

13. Inflation-Adjusted NASDAQ 100 Is Making New Bear Market Lows from Chart of the Day