There’s Always a Bubble....

Here’s a few things to consider:

• Consumers and companies adapt. That means even if the "tariffs" lasted for years there will be other effects that will cause these costs to blend into the mix of the evolving landscape. In fact, digging into the data shows they will likely benefit the US.
• Ask yourself what corporate structures do when a hurdle arises. It's Monday morning and you get the notice: “Tariffs added 12 cents to your cost of each XYZ widget.” Now, you don't want to pass this along to customers. So, you meet with colleagues and say, "Ok everyone, we need to find solutions. Our target is 12 cents of cost per XYZ widget."
• The likely actions? More technology, better processes, more efficiencies; a team effort to resolve a problem.

That's the way the world ticks in an advanced economy, not the way garbage headlines surmise.

This Wave is Just Starting to Build

The benefits of my oft-repeated reprise about Gen Y taking the economic reins from the Baby Boomers are rolling toward us by the trainload.

And it doesn’t much matter what the Federal Reserve does or how much you hate politics.

Walk with me:

Step 1: The Mass Refinance Boom for Companies

Medtronic recently did a $6B (Billion) bond refinance for a span of 40 years, but they did it in Europe (there is even a new term for these programs: "Reverse Yankees"). 

They’re one of just a few to do so thus far, but we should expect more companies to refinance debts at massively lower levels, even if they must do so overseas. 

The upshot? 

Well, two things come to mind:

1) Shockingly, the blended average of the various rate tranches on the MDT 6-tier bond offering show a rate cost of just 0.50% through the first 10 years!

2) More surprising is the net $95MM+ median annual interest cost saved each year for the next 4 decades. 

Now, I know this is just a tiny pinch of an example - a veritable drop in an ocean of activity - but ask yourself if you think they will be able to offset tariff costs with that $95MM+ in extra cash flow each year over the next, say, 40 years?

I think so, yes.

Step 2:  The Max Refi Boom Benefits (MRBB for short) for Consumers

It’s been suggested by several studies that the average household's per annum cost - for all of the tariffs (once they’ve all been in place for a full year - will run about $1,195.

But there’s a mental, and financial offset to that concern:

• Consider the overall benefit if just 40% of the $9.4 trillion of household mortgage debt was refinanced down 1 percentage point?
• That savings alone would be $4,000 - per year - for 30 years - for each homeowner.
• An average of 1.50% lower and that number increases to $6,000 per year in savings!

This of course, does not count the average drop seen in gasoline costs at the pump since the trade "war" began. 

The 35 cents less being paid per gallon used every day will save tens of billions of dollars as well.

And this is all happening while the “experts” try to focus our thinking on the tariff costs.

In all this trade war mess, once the dust has truly settled, the consumer will be better off and so will companies with debt costs.

Step 3:  The US Government Is Getting the Hint

US taxpayers are set to save untold trillions over the next 50 years, so long as Mnuchin actually acts upon the latest review of using much longer-term bonds.

It was covered last week that Mnuchin suggests our government is finally (Thank the Lord) considering the issuance of ultra-long bonds. 

Sell $10-$20Trillion of those and refi our own balance sheet and you will be shocked by the "cumulative tariff dividend" we’ll all receive.

The Bottom Line

The great refinancing cycle for America is just beginning. And the cumulative positive effects on our economy will be vastly more substantial than anyone is recognizing right now.

The Other Domino Effect

The dividend yield on the S&P is now well above the 30-year Treasury bond. 

The former tends to rise each year.

However, once bought, the latter never does.

If we can stop being afraid long enough, we might find this means many corporations could issue debt, get their interest costs deducted against taxes and shrink their capitalization by buying back shares.

In doing so, the rate of dividend will increase more steadily in the future while they actually reduce their aggregate dividend expense as fewer shares will be outstanding.

Net-Net

Like Warren Buffett stated months ago in an interview: "If you tell me that long-term interest rates stay at 2%, the value of the stock market would be significantly higher." 

When asked how high, his answer was: "...100,000 DOW would be a start..."

The Only Game in Town

It’s called risk aversion.

So, everyone knows the yield curve is inverted now. 

And it’s also correct that most of the time recessions are preceded by inversions. 

But this inversion is being caused by the long end of the curve, not the short end.

Think of it like a brilliant head fake.

There are other more important indicators that fail to confirm the yield curve signal. 

Multiple market-based indicators suggest the economy and financial markets are still in reasonably healthy condition.

The most significant "surprise" for the masses is the extraordinarily low level of real and nominal interest rates in the US, and in most major developed economies.

That shouldn’t be a surprise for those who read these notes.

And its end is nowhere in sight.

It is our view that very low interest rates are not necessarily a sign of impending doom or a recession.  Instead, they are more likely a reflection of two significant issues:

1) The widespread risk aversion actions among almost all market participants and,

2) The loss of the inflationary monster we have spent 40 years chasing.

Widespread risk aversion = less chance of negative surprises.

And a risk-averse market is less prone to disappointments and more able to withstand adverse shocks.

And it never hurts to have $14++ Trillion in the bank for that rainy decade.

That’s good news for long-term investors.

Is There a Bubble?

Yep.

The bubble is in fear.

Trade ranges slowly meet their end by pushing the angst levels so high throughout the crowd that fear becomes the overwhelming characteristic and drives the actions that the crowd takes with their money.

Why else would you buy a negative rate bond? Or a 10-year at 1.45%? Or buy a 30-year at 2%?

When you do these things you completely ignore the massive benefit to the equity side of the financial world. 

These low debt costs (as highlighted above) will set the stage for, and aid in driving profits higher in many layers of the financial world…and all the way to Main Street.