Thursday,
April 11, 2013
As Long As You Never Use It…
It’s a Great Deal
By Rodney Johnson, Editor, Survive & Prosper
Dear Al,
In the early 1950s, Dallas, Texas, suffered
a record drought. The town was practically a tinderbox, with officials worried
about the possibility of a massive fire that could raze the entire area to the
ground.
When the drought finally broke, regional
officials vowed they would beat Mother Nature by creating a series of
reservoirs, which is how the greater Dallas area came to be marked by many
large, manmade lakes.
Of course, the inevitable happened…
These lakes became watery playgrounds.
People started building homes near them to enjoy the waterfront life. This was
all great, right up until Dallas needed to use the water.
In the mid-2000s a fuel spill contaminated
one of the area’s main drinking water reservoirs. City officials studied their
options and created a contingency plan, which involved using Lake Ray Hubbard,
a very large reservoir surrounded by homes, for drinking water.
This plan would have taken almost all the
water out of the lake, leaving a big, messy mud pit behind. Naturally, citizens
along the lake were outraged. Not only would their property values plummet
because “mud-side living” doesn’t have the same ring to it as “lakeside living,” but also the stench and foul environment
would wreak havoc on the local communities.
The city’s response: “Not our problem! We didn’t build the reservoir so you could have a
water-front property.”
This story came to mind recently when Harry
Dent was on CNBC as the S&P 500 reached new highs…
As everyone familiar with our research
knows, we are somewhat bearish. We think that propping up a stock market by
printing trillions of new dollars while incurring trillions in new government
debt is a bad idea.
Silly us.
There was another panelist on that show that
took a bullish stance. His view was that, as long as the Fed keeps printing
trillions of new dollars, the sky is the limit! Everyone should jump into the
markets so they can cash in on the good times. { As in failed, oppressive Zimbabwe,
the best performing stock market of the past decade, current disaster the consequence
where portfolios ‘barely buy three eggs’in terms of real value. }
This struck me as the same as saying, “As long as Dallas never uses the lake water,
then lakeside residents have a great deal!”
What happens when things change?
Harry
pointed out that when the Fed stops printing there’ll be this massive sucking sound in the
financial sector, which will lead to a dramatic drop in the artificially
inflated assets.
The
bullish guy’s response was telling…
He agreed with Harry, and said that the
possibility of a big drop was the reason the Fed should NOT quit printing new
money.
Hmmm.
So, we have a financial meltdown caused by
too much debt and irresponsible lending. The Fed attempts to stave off the
resultant economic collapse by printing new dollars, which it then hands to
banks through asset purchases, and holding interest rates below inflation.
This does nothing to solve the long-term
economic slowdown, but it DOES create asset bubbles in some areas, including
the equity markets, while stealing value from savers.
And
now, five years after the downturn and four years after we began to recover, we’re supposed to count on the artificial
influence of the Federal Reserve to keep an asset bubble alive… even though the programs are not serving
their intended purpose?
Call
me skeptical. Call me anything you like. Just don’t be fooled…
We recognize that the markets are moving
higher, but we want to make sure we aren’t left standing when the music finally
stops. That’s why our Portfolio Manager for Boom & Bust, Adam
O’Dell,
keeps both long and short positions in our model portfolio. We want to capture
gains, but not be blind to the risk in the market.
And when both bears and bulls finally openly
discuss the house of cards on which market gains are based, it should be
obvious to everyone that things won’t end well. The only way for this to not
fall apart is for the Fed’s actions to become somewhat permanent, printing hundreds of
billions – if not trillions of dollars – per year, while holding interest rates
below the rate of inflation.
The continuation of these programs would
mean an ever-falling standard of living for the 80%+ Americans that live on
their paychecks or fixed income, while pushing up the value of
inflation-friendly assets that relatively few people own.
The old economist Herbert Stein once wrote, “If something cannot go on forever, it will
stop.”
Clever guy!
Rodney
Ahead of the Curve with Adam O'Dell
The
Great Disconnect
Rodney, as always, makes great points about
the rather befuddling disconnect between our economy and stock markets.
Of course, there’s always the argument that says, “Well, stock markets are representations of future economic growth.” This leads long-term bulls to the
conclusion that, based on record-highs in the markets, we must be due for a
full economic expansion… just around the corner.
I’d be fine with that, if the Fed weren’t involved to the extent that it is. Simply
put – Ben
Bernanke is manipulating the markets.
Once you accept this fact, you’re one step closer to everyone’s goal – growing and preserving wealth. It comes
down to a simple question: “Would you rather be right, or wealthy?”
Being right may earn you gold stars for
impressive essays on the atrocities of market manipulation… or the fundamental drivers of the market,
which are now being perverted.
But if you invest according to the premise
that “the market SHOULDN’T be this high,” you’ve been sorely disappointed over the past
four years. The fact is…the market IS this high. Remove the “should be’s” and “shouldn’t be’s”… and you’re left with what actually “is.”
Fighting the Fed is like running the wrong
way in Pamplona – not advisable!
That said, there are still decent
opportunities on the short side of the market – even today. That’s because the correlation between individual
stocks has been decreasing over the last couple of years. Stocks don’t simply go up and down together these days.
I
wrote about this in our January forecast issue of Boom & Bust.
Here’s a
chart I ran across this morning – it shows the decrease in correlations
between 2011 and 2012. The analysis covers stocks, sectors and countries. All
three studies show declining correlations – which provides a great environment for
stock pickers.
Boom
& Bust
subscribers are doing well – as I’ve identified unique investments on both
sides of the markets. As individual stocks “disconnect” from one another, good stocks are rewarded and
bad stocks are punished.
Here’s just one example from our current Boom & Bust portfolio. I can’t give away the names, but we’re long stock “A” and short stock “B.” Since late March, when I recommended the
short-sell trade, we’ve profited on both sides of the market.
Stock “A” is up 8.5%... and stock “B” is down 9.5% (which means we have a profit
of 9.5%, since we sold short).
Wednesday,
April 10, 2013
The Little Boys Who Can’t
By Harry S. Dent, Jr., Editor, Survive & Prosper
Dear Al,
‘Have you heard the story about the little
Dutch boy who saved Holland?
He was walking past an old dike one day when
he noticed a leak. Worried that the leak would only get worse, and eventually
flood his town, he stuck his finger into the hole. But then he couldn’t move
because, if he removed his finger, the leak would just start up again.
After some time, the town Burgomaster walked
past and saw the boy standing with his finger in the dike. When he found out
what the boy was doing, he praised him and then told him to stay there while he
called a council meeting.
The council thought the boy a hero and
decided that he’d solved the problem of the wall. Rather than fix it, the boy
could just continue to use his finger to keep the North Sea at bay.
Now, to alter the story ever so slightly…
When a second leak sprang up, the boy reached
out with his other arm and valiantly stuck another finger into the wall. There
he stood, spread-eagled up against the wall, the sea pushing with all its might
to get through.
Then a third leak began. Bigger this time.
Off came the boy’s shoe and into the new hole his toe went.
Then
a fourth leak further away… and a fifth… water breaking through the old wall
faster and faster. But the boy was already over extended and couldn’t do
anything about the other leaks. He was having enough trouble containing the
ones at his fingertips and toes…
And
then, just to add insult to injury, yet another leak broke through the wall,
spraying water right in the kid’s face.
Did I say he was a Dutch boy? Maybe I would
be more accurate calling him the ECB chairman… and that gush of water pouring
onto his face… well, that’s Cyprus.
In fairness though, I could just as easily
call him Ben Bernanke… or any other central banker in the world. They’re all
trying to hold back the tide of debt. In doing so, nothing is being done to fix
the leaking wall. In fact, it just keeps deteriorating. And in the end, they
can’t win. That wall’s coming down sooner or later.
The problem is, in central banks’ and
governments’ stubborn refusal to make the hard choices… to allow this winter
economic season to run its painful course so we can grow again… they are
hurting the average household.
They’re simply keeping the boom bubble that
benefited financial institutions and the top 1% to 20% going. And during this
so-called “recovery,” it’s those SAME players who are benefitting.
Surveys of households show that 78% don’t
feel we ever recovered from the great recession. That’s because most households
don’t have much of their assets in stocks (where most of the “recovery” has
taken place). Their inflation-adjusted wages are still going down. And a
quarter of all homes are still underwater. If anything, most people are still
feeling the bite of this economic season.
Ah… but more cracks are appearing… more
leaks springing up…
In their misguided, idiotic attempts to save
the economic world, governments are now starting to go after the rich people.
The U.S. is steadily increasing taxes on the top 1% to help balance the budget.
Cyprus is taxing international depositors 75% of their accounts over €100,000.
Both are stealing from their own citizens as
well. Cyprus is doing it blatantly by withholding people’s money. It’s in the
banks, they can see it, they just can’t have it. The U.S. is being more subtle,
keeping short-term interest rates at 0%, 10-year Treasury bond yields below 2%
and T-bills at zero. Over the last four years, this has taken away almost 10%
from American savers.
Unfortunately,
none of it is enough to even make a Dent (Yes! I just used my name in vain).
Get
ready for another downturn, despite massive stimulus. While most economists and
analysts warn you not to fight the Fed, that “they have your backs,” they
cannot continue to stimulate forever.
Think of it this way… if you keep pouring
sand on a flat surface, it will build a nice mound. Keep pouring and at some
point just one sand pebble will land the wrong way, in the wrong place, and set
in motion an avalanche.
An avalanche in this debt and demographic
crisis is inevitable and likely to occur between late 2014 and 2020 as
demographic and other cycles we measure worsen.
Protect yourself by getting more defensive
in your investments, especially by this summer, and through smart financial
planning that will protect you against rising taxes in the years ahead.
Harry
P.S.
With the euro zone wall practically a sieve, and the U.S., China and Japanese
walls deteriorating fast, we don’t expect the Dow to continue its upward moment
for much longer. Read our more detailed analysis of what we forecast for the
Dow, here.
Ahead of the
Curve with Adam O'Dell
Fighting Fire with Fire Burns All
The problem: too much debt.
The solution: less debt.
It’s really that simple.
Yet the Fed and ECB continue to fight fire with more fire. That is, they’re
fighting a private balance sheet recession (read: too much debt on the balance
sheet) with a public balance sheet explosion (read: even more debt on the balance sheet).
For now, it seems to be working…
This chart shows how the S&P 500 goes
higher when the Fed and ECB expand their balance sheets… and how the market
drops when central banks don’t stimulate.
Don’t be fooled.
The private sector took on as much debt as it possibly could through 2007
(pushing the markets higher)… then it stopped. Now, the Fed and ECB are taking
on as much debt as they possibly can so the music doesn’t stop. The problem is,
eventually, central banks must stop amassing debt. They too will need to
deleverage…’