Signs Point to a Global Slowdown

By James Rickards

Chart 1

This post Signs Point to a Global Slowdown appeared first on Daily Reckoning.

As gold has struggled through 2018, (down over 10% from $1,363/oz. on January 25 to $1,215/oz. today), my forecast for a strong year-end for gold has remained unchanged.

This forecast is based on a better-late-than-never realization by the Fed that they are overtightening into fundamental economic weakness, followed quickly by a full-reversal flip to easing in the form of pauses on rate hikes in September and December.

Those pauses will be an admission the Fed sees no way out of its multiple rounds of QE and extended zero interest rate policy from 2008 to 2013 without causing a new recession. Once that occurs, inflation is just a matter of time. Gold will respond accordingly.

Gold above $1,400/oz. by year-end is a distinct probability in my view. Even if gold rallies to the January 2018 high of $1,363/oz. by year-end, that’s an 11.5% gain in just a few month’s time.

Let’s drill down a bit.

Let’s start with the Fed. The reality of Fed tightening is beyond dispute. The Fed is raising interest rates 1% per year in four separate 0.25% hikes each March, June, September and December. (The exception is if the Fed “pauses” based on weak stock markets, employment, or disinflationary data, a subject to which we’ll return). The Fed is also slashing its balance sheet about $600 billion per year at its current tempo.

The equivalent rate hike impact of this balance sheet reduction is uncertain because this kind of shrinkage has never been done before in the 105-year history of the Fed. However, the best estimates are that the impact is roughly equivalent to another 1% rate hike per year.

Combining the actual rate hikes with the implied rate hikes of balance sheet reduction means the Fed is raising nominal rates about 2% per year starting from a zero rate level in late 2015. Actual inflation has risen slightly, but not more than about 0.50% per year over the past six months. The bottom line is that real rates (net of inflation) are going up about 1.5% per year under current policy.

From a zero base line, that’s a huge increase.

Those rate hikes would be fine if the economy were fundamentally strong, but it’s not. Real growth in Q2 2018 was 4.1%, but over 4.7% of that real growth was consumption, fixed investment (mostly commercial) and higher exports (getting ahead of tariffs).

The other components were either small (government consumption was +0.4%) or negative (private inventories were -1.1%). Q2 growth looks temporary and artificially bunched in a single quarter. Lower growth and a leveling out seem likely in the quarters ahead.

The Fed seems oblivious to these in-your-face negatives. The Fed is extending its growth forecasts to yield 2.27% for Q3 and Q4, and expects 2.71% for 2018 as a whole. That’s a significant boost from the 2.19% average real growth since the end of the last recession in June 2009.

By itself, that forecast offers no opening for a pause in planned Fed rate hikes or balance sheet reduction. The Fed is completely on track for more rate hikes, a reduced balance sheet, and no turning away from its current plans.

The Fed’s plan assumes all goes well with the economy over the rest of this year. That may be wishful thinking. Agricultural exports definitely surged in Q2 in an effort by Asian importers to take delivery of soybeans before tariffs were imposed.

The same can be said of specialized U.S. manufacturing exports. U.S. consumers went on a binge, but much of that was funded with credit cards where losses are already skyrocketing and a return to higher savings and less consumption has resulted.

A lot of the standout components in Q2 have already gone into reverse. Real annualized U.S. GDP growth exceeded 4% four times in the past nine years only to head for near-zero or even negative real growth in the months that followed. There’s no compelling reason to conclude that Q2 2018 will be any different. Data indicating performance close to recession levels will emerge in the next few months.

With Fed tightening and a weak economy on a collision course, the result might be a recession.

What’s my outlook for Fed policy, the U.S. dollar, and other major currencies including gold? I use the most advanced analytical tools to assess the influence of global economic and political conditions on currency and capital markets.

I created these tools along with colleagues while working in capital markets intelligence at the CIA. My associates and I used information from capital markets as a predictive analytic tool to uncover threats from terrorists and other U.S. adversaries in advance.

I use the same disciplines of complexity theory, applied mathematics, and dynamic systems analysis we used at CIA to spot hidden trends in markets that affect both exchange rates and asset valuations.

The single most important factor in the current analysis is that the U.S. does not exist in a vacuum. The Q2 real growth quarterly rise in Eurozone GDP was a disappointment and further evidence that the ECB is still distant from its ultimate goal of normalizing rates and its balance sheet as the Fed started in 2015.

Likewise, China’s PMI and related reports that arrived July 31 revealed a distinct slowdown in China, the world’s second-largest economy. The global impact of these conjoined European and Chinese slowdowns over the year ahead is shown clearly in Chart 1 below:

This mash-up of divergent critical paths among the world’s major economic blocks is best summarized in this downbeat July 31, 2018 synopsis from Capital Economics, a traditionally bullish voice:

“While global economic growth rebounded in Q2, it will probably slow again in the second half of this year and in 2019. The US will not be able to sustain annualized GDP growth of 4%, China’s economy is slowing steadily, and any pick-up in the euro-zone from a lackluster first half is likely to be modest.”

Meanwhile, policy organs of the U.S. other than the Fed are already joining forces to box-in the Chinese trading threat. …read more

From:: Daily Reckoning

Welcome to “New Age” Fiscal Policy

By Brian Maher


This post Welcome to “New Age” Fiscal Policy appeared first on Daily Reckoning.

The United States government, alas, is embarrassed for funds.

More money is going out the back door than is coming in the front.

So today Uncle Samuel holds his hat before the bond market… requesting to borrow $329 billion through September… and $440 billion by December.

Sixty-three percent higher, these numbers are, than the Treasury’s borrowings for the same period last year.

And this year’s debt spree promises to be the greatest since the depths of the financial crisis.

Thus we pause today to acknowledge the nation’s deliverance from the final vestiges of fiscal sobriety…

Official second-quarter growth nicked 4.1% — its grandest quarter in four years.

Unemployment is all but licked, we are told.

In a season of plenty, even the Keynesian prayer book preaches a gospel of fiscal restraint.

It is the time to gather acorns… to save against a time of lean kine… to lay up against the rainy day.

When recession inevitably arrives, the government can then meet the emergency with a full strongbox.

“Countercyclical” policy, academic men term it.

But even the old Keynesian religion has gone behind a cloud…

In its place we find “New Age” fiscal policy — the religion of perpetual deficit.

Analyst John Rubino on the new catechism:

Even Keynesianism, generally the most debt-friendly… school of economic thought, views deficit spending as a cyclical stabilizer. That is, in bad times governments should borrow and spend to keep the economy growing while in good times governments should scale back borrowing — and ideally run surpluses — to keep things from overheating.

But now we seem to have turned that logic on its head, with fiscal stimulus ramping up in the best of times, when unemployment is low, stock prices high and inflation stirring. New Age fiscal policy seems to call for continuous and growing deficits pretty much forever.

America’s debt-to-GDP ratio rises to 105%.

“Never in modern times,” warns analyst Sven Henrich, “have we seen tax cuts being implemented and spending increased with debt to GDP north of 100%.”

The reasons for the new deficit spending come in two inseparable parts:

One, $300 billion of new federal spending under last year’s bipartisan budget agreement.

Two, the Trump tax cuts that limit the government’s wherewithal to fund it.

Hence, the Treasury’s recent bond auctions to make the shortage good.

The Office of Management and Budget projects trillion-dollar deficits for the next four years — at least.

Meantime, the Congressional Budget Office projects nearly 4% economic growth as far as eyes can see:

But CBO’s forecast has a fatal hole in it…

It fails to account for possible recession.

At 108 months, the current “expansion” is the second longest in U.S. history.

By next July it will become the longest ever — if the gods are kind.

Can the economy peg along another four years without a recession?

Or even half so long?

We are unconvinced.

In the likely event of recession — depend on it — the spending floodgates will be thrown open.

“We get a recession,” affirms the aforesaid Henrich, “and you are looking at $2–3 trillion [annual] deficits.”

“A deficit explosion,” he styles it.

Here is our prediction:

Recession will likely fall within a year or two.

Deficit spending of the kind described will come issuing forth in full spate.

This deficit spending will exert vast upward pressure on interest rates.


Because only substantially greater rates will be able to lure investors at that point.

As analyst Michael Lebowitz explains:

If $2, 3 or 4 trillion of additional debt needs to find a home, it is quite likely that interest rates would rise sharply to attract new investors. Plus, there is one other small problem. As interest rates rise, the interest expense on the debt increases and drives funding needs even higher.

Here he knifes to the heart of the dilemma — rising interest expense on existing debt.

Rising debt service will likely lower the curtain on the entire show, as rising borrowing costs overwhelm the economic machinery.

Financial analyst Daniel R. Amerman:

Given its sheer size, if the interest rate on that debt were to rise by even 1%, the annual federal deficit rises by $200 billion. A 2% increase in interest rate levels would up the federal deficit by $400 billion, and if rates were 5% higher, the annual federal deficit rises by a full $1 trillion per year.

Could interest on the debt alone total $1 trillion per year?

The math is the math.

And we would remind that 5% interest rates are well within historical norms.

At that point the New Age fiscal policy would come crashing upon the rocks of actuarial fact.

A 40% plunge in the stock market — or more — cannot be excluded.

“The divine wrath is slow indeed in vengeance,” said Roman historian Valerius Maximus nearly 2,000 years ago…

“But it makes up for its tardiness by the severity of the punishment.”

Meantime, the recovery is eight years old… and counting…

Below, Jim Rickards shows you why “all signs” point to a global slowdown. Is the Fed prepared? Read on.


Brian Maher
Managing editor, The Daily Reckoning

The post Welcome to “New Age” Fiscal Policy appeared first on Daily Reckoning.

…read more

From:: Daily Reckoning

Aggressive Investments: How to Be Fearless, Smart and Profitable

By Nilus Mattive

Nilus Mattive

This post Aggressive Investments: How to Be Fearless, Smart and Profitable appeared first on Daily Reckoning.

I’ve had plenty of underwater positions over my career – some of which ultimately turned into huge winners and others that ended up as realized losses.

Hey, it happens to everyone!

But today I want to tell you why I’m able to sleep just fine even when an individual holding is down 20%, 30%, or even 60% from my original entry point.

The reason: Diversification.

In other words, I make sure that no single position represents a massive portion of overall investment capital – whether you’re talking about a real-money portfolio of a list of recommendations that I’m making to readers.

After all, it would be almost impossible to relax if your entire net worth were cut by 20% at any point in time!

In contrast, it’s no big deal to lose 20% on a stock that represents 5% of your equity portfolio, which in turn only represents 40% of your overall net worth.

I actually recommend having three different levels of diversification.

The first level is a healthy cash position for emergencies.

Before you invest a single dollar, I always recommend accumulating a good portion of money for emergency expenses, a potential loss of income, or some other unforeseen circumstance.

How much?

At least three months of your current expenses, and preferably far more. A full year would be great!

This money is not meant to generate a return; it’s meant to generate peace of mind.

Once you have your emergency fund in place, you maintain it in perpetuity – increasing it if your overall life expenses also escalate.

And please note that this keep-safe money is not the same thing as having some cash in a brokerage account earmarked for investment opportunities.

Cash meant for investments ought to be completely separate.

But once you have that additional cash for investing, you should also make sure that you’re allocating it among the major asset classes – like stocks, bonds, real estate, and precious metals.

This is your second layer of diversification – spreading your wealth among various asset classes.

Generally speaking, one major asset class will rise when another is falling… or at the very least, each will respond to various macro events differently.

So once you determine your target asset allocation – i.e. the percentage of your investment capital you want to put in each – you can simply rebalance your holdings whenever things get out of whack.

Here’s an example:

Joe wants to have 60% of his investable assets in stocks, 35% in bonds, and 5% in gold.

But after the big stock market run, his stock holdings have surged in value to the point where they’re worth 75% of his total portfolio.

Therefore, Joe should now consider selling some of his stock holdings and invest the proceeds back into bonds and gold so that his overall target allocation is maintained.

Of course, it also makes sense to hold more than one particular stock or one single bond!

This is the third layer of diversification – owning different investments within the same asset class.

If you use exchange-traded funds or mutual funds, then it’s likely that you’re getting some degree of instant diversification in a particular asset class.

Still, I would make sure you’re investing in a number of different funds so you can participate in various market moves.

If you’re buying individual stocks and bonds, then I think it’s absolutely critical that you spread your money across at least 10 or 20 different positions.

In the case of stocks, you should do your best to get exposure to a wide range of different sectors and industries.

With bonds, you will want to hold not only different types but also different maturities.

That way, even if some particular investment is going down in value, you’ll have others that could be rising.

Also remember to factor in your home or any other physical real estate you own when looking at your overall asset allocation plan… especially since they often represent a large part of your total net worth.

At the end of the day, when you have all these different levels of diversification, you’ll be able to rest easier knowing that no single event is likely to ever impact your overall financial picture in a catastrophic way.

To a richer life,

Nilus Mattive
Editor, Rich Life Roadmap

The post Aggressive Investments: How to Be Fearless, Smart and Profitable appeared first on Daily Reckoning.

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From:: Daily Reckoning

These 3 Traits Will Earn You More Money

By Nilus Mattive

Nilus Mattive

This post 
These 3 Traits Will Earn You More Money appeared first on Daily Reckoning.

The saying that nice guys finish last is true.

In fact, a new study published in the journal Labour Economics finds that agreeableness is one personality trait that negatively affects a man’s earning potential after age 40.

Dr. Miriam Gensowski, a professor in the Department of Economics at the University of Copenhagen, recently published a paper that looked at the connection between personality traits and lifetime earnings among men at different ages.

What I like about Dr. Gensowski’s paper compared to most articles and books you’ll find on this topic is that her findings are not anecdotal. She’s not saying, I interviewed several rich people and this what I found in common…

Dr. Gensowski’s study used data from the Terman study, one of the longest running studies in psychology that examines the development of gifted individuals since 1922.

“It has followed over 1,000 men and women in California who were selected for having IQs of at least 140 (the top 0.5% of the population),” says Dr. Gensowski. “It is probably the only study that has U.S. data on earnings throughout a lifetime, which allowed me to relate early measures of personality to annual earnings from age 18 to 75.”

The benefit of linking earnings later in life to personality measured at a young age, says Dr. Gensowski, is that it ensures the association between traits and earnings was not because someone lucked into a high income and became more extroverted as a result.

“Instead, we can interpret the association as personality influencing earnings.”

Okay, but how much can personality really affect earnings?

According to Dr. Gensowski, the overall effect of personality on lifetime earnings is large. “In the same order of magnitude as the average lifetime earnings difference between high school and college graduates in my sample: over $1.2 million.”

So what are the three personality traits?

  1. Conscientiousness
  2. Extraversion
  3. Agreeableness

Let’s take a closer look at all three.

Personality Trait #1

Dr. Gensowski defines conscientiousness as someone who is hard-working, driven, reliable, and organized. This isn’t all that surprising for a high achiever. And otherstudies… have proven similar findings.

Around age 30 is when men who are more conscientious start to earn more.

“I found that in early years, earnings were no different for men with strong personality traits. At around age 30, a gap emerged, as men who were more conscientious, extroverted, and less agreeable started earning more,” says Dr. Gensowski.

But not until age 40+ do earnings skyrocket for men… “These gains from conscientiousness and extraversion (between $10-20,000 annually) fully unfolded in the prime working years, between the ages of 40 and 60.”

She also adds that conscientious men typically receive higher wages for being more productive on the job. They are more likely to obtain higher education, which in turn boosts earnings. And individuals that are more conscientious tend to lead longer and healthier working lives, therefore accumulating higher lifetime earnings.

Personality Trait #2

It’s easy to imagine why someone more extroverted might have an edge in the workforce. The old saying, (it’s not what you know…) plays in favor of those people willing to put themselves out there and network. But how much can being an extrovert influence lifetime earnings?

Apparently, a lot.

“Consider two men in the Terman study, who are equal on all background characteristics and all traits, except for extraversion, says Dr. Gensowski. “The man who is average on this trait will earn $600,000 more over a lifetime than his more introverted peer (whose extraversion is, say, in the bottom 20% of the distribution). This effect size corresponds to about 15% of lifetime earnings.”

Personality Trait #3

In Robert Ringer’s bestselling book Winning Through Intimidation he writes “reality isn’t the way you wish things to be, nor the way they appear to be, but the way they actually are. Either you acknowledge reality and use it to your benefit, or it will automatically work against you.”

It might not seem fair that guys who are less agreeable make more money, but that’s the reality.

Dr. Gensowski says, “I also found that more agreeable men, who tend to be friendly and helpful to others, have significantly lower earnings than less agreeable men. The man who is very agreeable (in the top 20%) will earn about $270,000 less over a lifetime than the average man.”

Takeaway: don’t feel bad about being the old, grumpy, rich guy in the office.

Why This Subgroup Earned More Than Twice As Much As Others

One last bit from the paper I found interesting: highly educated men benefit more than twice as much from these three personality traits (conscientiousness, extraversion, and low agreeableness) than less educated men.

For example, when comparing two men with a bachelor’s degree, the introvert (bottom 20% of extraversion) will earn about $290,000 less than his peer with average extraversion. This earnings difference increases to about $760,000 when we compare an introvert to someone at the average extraversion when both hold a Master’s or doctorate, says Dr. Gensowski.

But wait… aren’t all these men geniuses?

One caveat you might have noticed was that all the subjects in the Terman study had higher-than average IQs. Is it fair to compare the average person who’s strong in these three personality traits to Terman subjects?

Dr. Gensowski thinks yes, it’s fair, and her argument is pretty sound: “This depends on whether careers develop in a similar way now as they did back then. We have reason to believe that the basic mechanisms that determine which skills drive earnings – such as productivity, promotions, and health behaviors – are still quite similar. And they seem to be. In fact, the personality traits that have the strongest association with lifetime earnings in Terman are exactly the same traits that are found to be most important for wages among today’s workers.”

To a richer life,

Nilus Mattive
Editor, Rich Life Roadmap

The post 
These 3 Traits Will Earn You More Money appeared first on Daily Reckoning.

…read more

From:: Daily Reckoning

The Sad Fate of Companies — and Empires

By Brian Maher

The Power of Buybacks Chart

This post The Sad Fate of Companies — and Empires appeared first on Daily Reckoning.

Apple wins the race… first U.S. company to a $1 trillion market cap.

Inspired by strong quarterly earnings, Apple ran down favored Amazon in the final turn… and broke the tape yesterday morning.

From the press stand rose a mighty roar…

“Apple Officially Becomes First U.S. Company With $1 Trillion Market Cap,” MarketWatch thundered.

“Apple Makes History by Becoming First U.S. Company to Reach $1 Trillion,” cheered USA Today.

“Apple Reaches $1000000000000 Value,” came joyous word from CNN.

Poor Apple.

Yesterday most likely represented “Peak Apple”… and it’s probably downhill from here.

Market analyst Mark Hulbert has identified the S&P’s leading stock by market cap each year since 1980.

He then compared its subsequent annual performance to the S&P as a whole.

What were the results?

“On average,” Hulbert found, “those stocks lagged the index by more than 4 percentage points a year.”

The roster of faded glory includes former kingpins as IBM… Microsoft… General Electric.

Will Apple face down these odds?

Apple is not the world’s first trillion-dollar concern, incidentally.

That honor falls to PetroChina, which excelled that gorgeous number after its 2007 IPO — and subsequently hemorrhaged $800 billion over the ensuing decade.

We do not project a similar collapse for Apple.

We expect rather a gradual yielding, a slow-motion arson, a dying by centimeters and inches.

Next year’s iPhone is not in jeopardy.

But we question Apple’s ability to remain in first place for another reason altogether…

Like much of the stock market itself, Apple’s milestone is rigged… ersatz… fake news.

Its victory arrives in part through the dark divinities of modern finance — stock buybacks.

The Fed’s ultra-low interest rates have enabled corporations to borrow vast amounts at next to zero cost.

With this debt many have purchased their own stock at an unprecedented gallop.

First-quarter buybacks totaled $242 billion — a record.

Second-quarter buybacks doubled that record — to $433.6 billion, according to research firm TrimTabs.

These buybacks reduce shares outstanding… increase earnings per share… and lift the stock price.

And Apple is king of buybacks.

Through the year’s first six months, Apple has purchased over $43 billion worth of its own stock.

That is the largest amount of buybacks in history, according to Howard Silverblatt, senior analyst with S&P Dow Jones Indices.

Is it a wonder why Apple stock has risen 16% this year… while the S&P is up a mere 5% for 2018?

In fact, buybacks account for 42% of Apple’s gains since 2013, according to Bloomberg’s Dave Wilson:

But how do these buybacks relate to Apple’s record $1 trillion market cap?

A company’s market cap is calculated by multiplying its number of outstanding shares by its stock price.

Apple had over 4.8 billion shares outstanding as of July 20 — according to the most recent data.

Based on that figure Apple’s stock needed to strike $207.05 per share to excel $1 trillion.

Buoyed by a positive earnings report, Apple stock attained that mark yesterday morning — $207.05.

And so, with its thumb heavily on the scale… Apple becomes the first U.S. corporation to $1 trillion.

As reports Kevin Kelleher in Fortune, “Apple’s march toward a $1 trillion valuation is much of its own making,”

But at what price?

Every dollar sunk in buybacks is a dollar unspent on expanding the business… equipment… research and development.

Comes a point when the cheap credit dries up… and buybacks no longer pay.

At that point a business must justify its market cap through higher productivity — not parlor tricks.

Wouldn’t Apple’s long-term interests be better served by spending on R&D instead of buybacks?

The “next big thing” is out there, awaiting discovery.

And if Apple doesn’t unearth it… someone else will.

The one constant in this world of markets and men… is change.

Today’s first violin is tomorrow’s second fiddle. And vice versa.

So it is in business. So it is with nations… and empires.

They too enjoy their moments of peak market cap…

Ancient Athens attained peak market cap in the fifth century B.C. — “the Golden Age of Athens.”

Athens had led a coalition of Greek city-states that defeated Persian invaders, and emerged undisputed leader of the Hellenic world.

The United States is not the first power in history to spread democracy abroad.

Yet in time Athens grew arrogant. Its former allies began seeking a balancing counterweight.

Sparta assumed that role.

The 27-year Peloponnesian War that followed ultimately took Athens to its knees… and the Golden Age was no more.

Rome’s market cap attained zenith in the second century (A.D.), under the emperor Trajan.

Roman power covered Britain in the northwest, Mesopotamia in the east, North Africa in the south — and all points in between.

To what city did all roads lead?

But the civilizational sinews ultimately weakened… a corrupting rot seeped into the marrows… and Rome began losing market cap.

Barbarians ultimately breached the walls and sacked the place, wondering what the toilets were for.

Rome fell in 476.

Now come forward a bit…

The British Empire, on which the sun never set — and on which the blood never dried — reached peak market cap in 1914, before the Great War.

It would never reclaim it.

The Soviet Empire saw its market cap peak in the 1970s — then collapse to zero on Christmas Day, 1991.

Which brings us to these United States. What about its market cap?

We estimate America reached peak market cap during the 1990s.

It was the lone remaining superpower.

It’s victory over communism marked the “end of history.”

America bestrode the world like an overtowering Colossus… and all the world’s divergent rays converged upon the new Rome.

But history began anew on Sept. 11, 2001.

America has been frittering away its market share ever since…

In Afghanistan — the graveyard of empires — in Iraq, Libya, Syria and elsewhere.

America’s mission civilisatrice to spread the democracy the world over now appears a bankrupt currency.

Who really believes in it anymore?

As the Greek city-states sought to counter Athenian power, many of today’s powers seek alternatives to American power.

Perhaps China is the new Sparta to the American Athens — as the Soviet Union was before.

But like Apple, America will not lose its market share tomorrow or the day after.

It is too big, too rich, too powerful — too American.

And no one power is ready …read more

From:: Daily Reckoning

More Planning Made Simple: How to Avoid Scrambling Your Retirement Nest Eggs

By Nilus Mattive

Nilus Mattive

This post More Planning Made Simple: How to Avoid Scrambling Your Retirement Nest Eggs appeared first on Daily Reckoning.

You know the value of diversifying your financial portfolio. For example, when your stock portfolio slips, your other investments—bonds, Treasury notes, etc.—shore up those temporary downticks before the stop loss or limit order directives kick in.

It’s about balance and minimizing risk.

Pause for a moment and inventory your retirement savings strategy. Your 401(k) and IRA are chugging along nicely. You contribute the maximum to each. You are satisfied that your stockbroker is looking after everything, and your investments in stocks are good for the long haul.

So, you are in your prime earning years and know the value of spending less than you earn. That means you are funneling that excess income somewhere and paying interest on its dividends and earnings.

What about your life insurance?

Did you know that annuities are a special kind of life insurance?

Purchasing an annuity from a reputable company is also another way to diversify your retirement planning.

When you open an annuity account, you pay a large lump-sum premium up front. At some agreed time in the future, you—the annuitant—will receive a payout on a scheduled basis. The remaining principal continues to earn interest. Anything left in the account after you die goes to your heirs.

Annuities come in two flavors…

The two categories of annuities are immediate and deferred. The latter two terms relate to the payout options in the annuity plan:

1. The immediate annuity is rather like a reverse mortgage without chipping away at your estate. You contribute a lump sum up front. After 30 days you receive monthly payments while the principal continues to earn interest.

2. The deferred annuity also requires an upfront payment. Over the agreed life of the annuity, your account accumulates interest—either fixed or variable, depending on the annuity you purchased.

At some future date, you start drawing the money as annuitized payments. It’s like a second paycheck.

Deferred annuities also come in two varieties…

Fixed annuities are like CD investments. They pay a guaranteed interest rate, frequently higher than a bank CD.

Variable annuities, on the other hand, pay interest based on the insurance company’s selection of financial market investments.

Annuities often get a bad rap…

Annuities have their drawbacks. They don’t have the big returns and dividends that other investment plans offer. You must have the cash to set aside and the patience to accrue their long-term value. There are setup fees and penalties for early withdrawal.

However, every investment has its drawbacks. The stock market is volatile and poses risk; bonds have low returns. Hoarding cash in the bank won’t keep up with inflation.

Moreover, when it comes time to start drawing down on the principal, you have no guarantee that your investments won’t expire before you do.

Annuities are the hedge against the emotion of fear that you will run out of funds before you die.

10 ways that annuities reduce risk to your retirement plans

Annuities are a piece in your retirement puzzle…

You have done your research. You know the risks. Your money market and stock portfolio have done well.

However, you are entering a stage in your life where risk reduction is quickly becoming more important than high returns.

So, an annuity—especially a fixed annuity—can contribute to your low-risk retirement strategy in the following ways:

1. With an annuity, you convert accumulated assets into a regular cash flow. Your annuity payout is similar to a paycheck, without liquidating your principal.

2. With a fixed annuity, you know exactly how much interest your savings will earn. Interest rates in fixed annuities are guaranteed.

3. For the bold: If you’re still into a bit of a risk, you could consider buying both fixed and variable annuities. The former will earn more when the stock market is doing well. The latter (the fixed annuity) will grow no matter what.

4. There is no upfront or annual limit to contribution to an annuity account. A variable annuity provides an instant tax shelter for your extra cash contributions.

5. The lifetime benefits of annuities accrue immediately. During the contribution phase, the account grows tax-free.

6. Annuities are tax deferred. You pay no tax on the annuity principal investment or the accrued earnings.

7. Taxes are only due when the payouts begin. The payouts typically come at a time when you are in a lower tax bracket.

8. Annuities offer a safe investment strategy. The biggest risk to annuities would be an insurer’s default because of bankruptcy, etc. So, it is important to choose a stable and reputable insurer.

9. As an insurance policy, the annuity provides survival benefits. Your heirs inherit the annuity without the delay of probate.

10. With a long-term care rider, you can receive both a retirement income and finance any long-term care expenses. This type of annuity does double duty without losing premium payments if you don’t need long-term care.

It’s about peace of mind…

Let’s review:

A fixed annuity can be an ideal way to protect a large portion of your retirement savings. When you reach the limits of your contributions to your IRA and 401(k), you can put that money to work.

Annuities are safe and stable. You earn a guaranteed rate of growth and accrue compound savings advantages as well as tax deferrals.

Your savings are not exposed to the volatility of the stock market. If the market dips right before you retire, it could take a chunk of your portfolio with it.

As part of estate planning, fixed annuities are not subject to probate. You spouse has the option to assume uninterrupted ownership, or continue receiving your payments during the contract period.

So, if you are at a stage in your life where you would like to grow that retirement nest egg, do some research and find a reputable annuity vendor. Round out your portfolio with an annuity plan to make your nest egg into a tasty omelet.

To a richer life,

Nilus Mattive
Editor, Rich Life Roadmap

The post More Planning Made Simple: How to Avoid Scrambling Your Retirement Nest Eggs appeared first on Daily Reckoning.

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How I Made Millions By “Swimming With The Current”

By Zach Scheidt

zach biking

This post How I Made Millions By “Swimming With The Current” appeared first on Daily Reckoning.

You’ve probably heard there are no shortcuts when it comes to growing your wealth. Hard work, patience, and discipline pay off in the long run.

Sound familiar?

Hopefully you know me well enough to understand that I’m all for hard work, patience and discipline.

But today, I want to tell you about one shortcut that actually can help you build your wealth more quickly.

I was thinking about this shortcut this past weekend because I took a similar shortcut in the Whistler Ironman triathlon that I was competing in.

I always laugh at how life experiences can tie so closely to the stock market and the opportunities we have as investors…

If you want to finish an Ironman triathlon, you have to look for ways to conserve energy. After all, the race consists of a 2.4 mile swim, a 112 mile bike and a 26.2 mile run.

We started the swim just after 6:00 AM on Sunday and I felt strong as the event began.

About halfway through the course, I made a turn around a buoy and noticed another swimmer next to me. He was a large guy and he happened to be moving about the same speed as me.

I immediately recognized this as an opportunity to save some energy for later.

As each swimmer glides through the water, he or she creates a small current in the water behind. So if you swim in the path immediately behind another athlete, you can actually get swept along within that current.

While not allowed on the bike course, it’s perfectly legal to “draft” behind other swimmers.

This drafting allowed me to keep moving at a quick pace while putting a lot less effort into my stroke. And that allowed me to save strength that I would desperately need on the bike and run course.

I had to laugh when I felt another swimmer tap my feet with his hands a few minutes later.

We were now both swimming in the current created by this athlete. So now two of us were getting a little bit of a break while making this poor guy do all of the work!

Swimming With The Investment Whales

Drafting in the clear alpine lake reminded me of how stocks often move in a trend or “current.” These currents are driven by the buy and sell decisions of the biggest institutional investors.

Just like I was able to slip behind the swimmer in the lake — and get his current to pull me through the water — investors can slip behind these institutional investors and ride the trends in the market.

You see, when there are large buy orders for a stock, the price naturally moves higher. That’s because there are only so many people willing to sell at today’s price. So the more shares an institution wants to buy, the more they’ll have to pay to convince other shareholders to sell.

If you pay attention, you can see this happening in the market.

The best way to spot this action is to look for a stock that is moving higher while its volume is increasing at the same time.

(Volume is simply the number of shares traded in a specific period. And you can see a stock’s volume on just about any free online financial website.)

Institutions have to buy many shares for a position to make a difference in their account. Often we’re talking about millions of shares. And since these institutions are buying such big blocks of stock, it can take them days, weeks, or even months to build a full position.

That’s where the “current” comes in to play.

As these investors build their positions, stocks naturally rise. And if you spot it in time, you can jump in and buy your own shares. Since you’re an individual investor, you can get a position bought quickly — without needing to take weeks to get enough shares to matter.

Then, once you own your shares, the institutional investors will continue to build their positions, driving the stock price higher while you hold your position.

This “drafting” strategy is a perfectly legal and effective way to accelerate your wealth building in the stock market. And it’s a fundamental strategy that I’ve used throughout my career to pull MILLIONS of dollars from the stock market for clients.

All by riding the currents established by institutional investors!

And this is a strategy that you can also take advantage of… If you know where to look, of course.

For more on this strategy and the newest stocks that institutional investors are currently buying hand over fist, click here.

And the next time you’re thinking about adding a stock to your investment account, remember to swim with the current and look carefully for one of these trends with higher volume.

Here’s to growing and protecting your wealth!

Zach Scheidt

Zach Scheidt
Editor, The Daily Edge

P.S. This “drafting” strategy is so powerful that Wall Street has its own special machines reporting these insights DAILY to its traders.

And for a limited time, you too can have access to one of Wall Street’s most prized tools…

That could give you the chance to walk away with $16,209 on average every week!

That’s life-changing money.

But it won’t last long… After all, do you think the Wall Street Elite want the “Average Joe” on Main Street to have access to their secrets?

Click here for the full details.

The post How I Made Millions By “Swimming With The Current” appeared first on Daily Reckoning.

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“Smart Money” Is Piling Into This E-Commerce Stock (Not Amazon)

By Jody Chudley

Merchant strategy

This post “Smart Money” Is Piling Into This E-Commerce Stock (Not Amazon) appeared first on Daily Reckoning.

If a hedge fund manager who has achieved annualized returns of 23 percent over the past twenty-one years offered you a stock tip, would you listen?

Before you answer, let’s put in perspective how good an annualized 23 percent return over 21 years is:

  • Over the same 21 year period of time, the S&P 500 has increased at annualized rate of just 8 percent per year. The S&P performance isn’t bad, but it is only one-third of what this hedge fund star has achieved
  • That 23 percent rate of return is what is left over for investors after deducting his egregious fees (a flat 2 percent plus another 20 percent of profits). That means his true investment returns are closer to 30 percent
  • A $10,000 investment 21 years ago compounded at 23 percent would be worth $772,693 today versus the $50,553 it would be worth at the 8 percent return of the S&P 500. That’s the magical power of compound interest!

So about that stock tip…

The Outstanding Investor And His Most Recent Major Stock Purchase

The investor I’m referring to is Third Point Capital’s Dan Loeb. As of June 30, 2018, Loeb’s Third Point Ultra Fund has in fact returned 23 percent annualized after fees since it was formed in 1997.

After 21 years, I’m inclined to believe that there is some skill involved here, not just luck.

This week, Loeb just revealed through his second quarter 2018 investor letter that the latest addition to his Third Point portfolio is the online payment company PayPal (PYPL). Loeb also revealed that Third Point started building its position in shares of PayPal in the second quarter of this year.

Based on what Loeb wrote about PayPal in his shareholder letter, I daresay that he hasn’t bought shares of this company looking for a short-term gain. It looks to me like PayPal is going to be a core Third Point holding for years to come.

Loeb believes that this is a fantastic business that is going to grow earnings at a rapid clip for a long time to come.

What Loeb likes specifically about PayPal is that has established a dominant position in its business. He points to the fact that PayPal is an online payments company that currently processes almost 30 percent of all e-commerce transactions globally (excluding China).

That is impressive. I’m hard pressed to think of many companies that hold a 30 percent market share in such an important industry.

PayPal is a company that is ingrained in the future growth of online consumption. There are few — if any — trends that I’d prefer to have exposure to than the growth in e-commerce. I was surprised to learn that even today, e-commerce accounts for just 10 percent of all retail transactions.1 That percentage is going to increase many times over in the coming years and PayPal is going to be a huge direct beneficiary of it.

With 237 million active accounts and 19 million different merchants locked in using PayPal, Loeb notes in his letter that PayPal has a scale advantage that is ten times that of its competitors.

That is the kind of business moat that all great investors dream of.

Click to enlarge

In addition to the rapid revenue growth that the continued global move to e-commerce will bring, Loeb also believe that PayPal has a big opportunity to improve its profit margins by making its operations more efficient.

While PayPal has been around since the late 90s, it has only operated as a standalone business for the past three years since being spun-off by EBay. As a result, there are still low hanging efficiency gains to be picked.

Today, PayPal generates a 25 percent operating profit margin on net revenues. Loeb believes that should be closer to 30 percent and will be as IT service costs are rationalized. There are 18,000 service jobs that are prime candidates for automation.

Doing so will add more than $500 million to PayPal’s bottom line.

Loeb expects that PayPal is going to produce earnings over the next 18 months that significantly beat what analysts are currently estimating. His target price for PayPal is $125 before the end of 2019.

With PayPal shares having pulled back recently, that would mean that there is 50 percent upside to be realized in a pretty short period of time if Loeb’s vision comes to pass.

Given that he has put up a two decade investment track record that is absolutely phenomenal, I wouldn’t be inclined to bet against him.

Here’s to looking through the windshield,

Jody Chudley

P.S. This “follow the smart money” strategy is exactly what your Daily Edge editor Zach Scheidt has used to pull MILLIONS of dollars out of the stock market in his career.

And tomorrow, he’s peeling back the cover on this strategy to help everyday investors like you start profiting! Stay tuned. This is a retirement life-saver you won’t want to miss.

1E-Commerce Retail Sales as a Percent of Total Sales, FRED

The post “Smart Money” Is Piling Into This E-Commerce Stock (Not Amazon) appeared first on Daily Reckoning.

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When to Cut and Run vs. When to Double Down

By Nilus Mattive

Chart 1

This post When to Cut and Run vs. When to Double Down appeared first on Daily Reckoning.

Underwater positions – there is no topic that investors would rather avoid talking about.

But as I pointed out in a recent article on diversification, some positions are going to head in the opposite direction of where you want them to.

So the issue is more about when – or IF – you should close out any losing positions in your portfolio.

I generally go against the grain when it comes to this type of decision.

See, a lot of experts will say you should just sell a position when it reaches a particular percentage loss… the whole “cut your losses short and let your winners run” theory.

For more trading-oriented strategies, I think that can make a lot of sense.

It encourages you to be less emotional about your investments… and the discipline automatically limits the amount of capital you can lose on any single trade.

But if you have a longer time horizon, or your goal is generating solid investment income, I’d tell you to reconsider creating arbitrary stop loss signals.

In fact, I have no problem sitting on a losing position because I have seen many come roaring back!

Here’s a recent example from one of my own personal portfolios.

On June 28th of last year, I purchase 428 shares of Supervalu, a grocery chain operator and food distribution company.

The stock was already very beaten down and trading at $22.45.

Unfortunately, it continued to head even lower and by October 20th it was at $14.90.

A lot of people would have simply sold by this point.

I actually bought another 500 shares.

I now had $17,058.92 invested in the stock… no small amount of money.

So you can imagine how gut wrenching it was to see the shares go even a bit LOWER still!

But I was convinced Supervalu was still worth far more than the market price so I held firm.

Here’s a chart that shows the action with my buy points circled…

Then, a couple positive developments started happening, including a new activist investor establishing a big stake and pushing for changes…

The stock started rebounding into the $20s…

And then last Thursday, July 26th, United Natural Foods offered to buy the entire company for roughly $32.50 a share – a 67% premium to the previous day’s closing price.

That’s the big spike you see right at the end of my chart.

End result?

I just booked a $12,740 profit in one year (actually much less on average, since more than half of my position was established when I doubled down in October).

This is hardly a fluke.

It’s actually the SECOND time I’ve seen this happen just with Supervalu.

The first time was back in 2012, when I recommended the stock for my Dad’s real-money $100,000 retirement portfolio… the one I was sharing with tens of thousands of readers.

Just like this recent time, the grocer’s stock had already been punished pretty severely but that didn’t stop it from going MUCH lower after my Dad (and probably many readers) had bought in.

As you can see from this chart below, at one point the shares were actually down more than 60% from Dad’s original entry point in the $7 range.

Chart 2

Wow, talk about a gut-wrenching decline!

Once again, most investors would have certainly dumped at some point, taken a big loss, and moved on.

But nothing about my investment thesis had changed.

And ultimately, I WAS vindicated on Supervalu that time, too, because the company started turning things around like I predicted.

First, it reached an agreement to sell some of its chains — including Albertsons, Acme, Shaw’s and Star Market — to a consortium of investors led by Cerberus Capital Management.

Then, its results started improving and the business returned to profitability.

Just take a look at this second chart, which is the same one as above with all the subsequent action added in.

You can see how quickly the stock started bouncing back to – and ultimately ABOVE – the original recommendation point.

My Dad ended up booking a solid 30.8% total return on the position once it hit my short-term price target.

And anyone who bought in at lower prices as I continued to pound the table on this stock could have more than TRIPLED their initial investment.

I could keep giving you more examples beyond Supervalu but here’s the bottom line…

If you’re a long-term investor and the fundamental reasons for owning a given position haven’t changed, I believe it makes sense to continue holding … especially if you’re receiving dividends along the way.

Moreover, the better you understand those fundamental reasons for owning a stock, the more confident you’ll be in staying put while the market goes against you.

You may even consider adding more shares on serious weakness.

Because as my latest Supervalu investment just proved, it’s entirely possible to see a 67% jump in one single day … rewarding anyone with guts, patience and conviction.

To a richer life,

Nilus Mattive

Nilus Mattive
Editor, Rich Life Roadmap

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Trump Takes a Page From Nixon’s Playbook

By Nomi Prins

This post Trump Takes a Page From Nixon’s Playbook appeared first on Daily Reckoning.

Historically, presidents have refrained from publicly commenting on the Federal Reserve’s policy. This allows the Fed to maintain its veneer of independence.

However, it is clear that this White House is very different. President Trump is not one to keep his opinions quiet. Trump has publicly expressed frustration with the Fed, believing its rate hikes could negate the impact of the tax cuts impact growth.

During a recent interview with CNBC Squawk Box host, Joe Kernen, Trump said, “I’m not thrilled” about the rate hikes. Why not? The president continued:

Because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it… I don’t like all of this work that we’re putting into the economy and then I see rates going up.

As further indication of how different Trump is from previous presidents, he added these remarks about commenting on Fed policy:

Now I’m just saying the same thing that I would have said as a private citizen. So somebody would say, ‘Oh, maybe you shouldn’t say that as president.’ I couldn’t care less what they say, because my views haven’t changed.

Stocks, markets and the dollar fell on his remarks. Sticking with tradition, the Fed did not comment on them. But here’s what Powell has on his mind…

As geopolitical tensions rise, trade wars mount, currency wars spawn and volatility continues to build, it’s clear the economy faces increasing pressure that could spiral into recession or worse.

Powell met with senior officials at the Fed recently to consider monetary policy in the wake of Trump’s comments (and though he didn’t say it, the markets).

After the interview aired, the White House issued a statement in which it “emphasized that Trump did not mean to influence the Fed’s decision-making process.”

But that’s just typical spin. While Powell wants to portray his independence, the fact remains he was still appointed by Trump. That’s political influence in the making.

President Trump’s indirect pressuring of the Federal Reserve not to raise rates is not unprecedented. He took a page out of another Republican president’s playbook – Richard Nixon. When the Fed began raising interest rates during Nixon’s term, he also raised objections, although not in public like the current president.

Back then, the U.S. had been in the throes of a recession in the beginning of the 1970s. The Fed had cut rates by half to stimulate the economy. There was no quantitative easing (QE) program during that period. That’s because it wasn’t a banking crisis preceding that recession, so the level of Fed support wasn’t anywhere near as expansive as it has been this past decade.

Fed Chairman Arthur Burns believed that “awful problems” could occur if the Fed didn’t raise rates in tandem with the growing economy. On a somewhat lesser scale, that’s the position of Jerome Powell today.

He wants to head off what he perceives as inflationary pressures before they jeopardize the current recovery. He doesn’t want to play catch-up and have to drastically reverse course down the road.

But Nixon didn’t want to risk cooling it off before his 1972 election. As White House audio tapes recorded, Nixon told Burns on March 19, 1971, “We’ve really got to think of goosing it… late summer and fall of this year and next year.”

Subsequent conversations led to a reversal of rate hikes during the fall of 1971. But importantly, what President Trump should know is that Nixon’s intervention into the Fed’s policies didn’t end well.

Burns’ reversal inevitably led to one of the highest inflationary periods in U.S. history. And of course the term “stagflation” entered the language during the ‘70s, with their high inflation and limited growth. I remember the gas lines very well.

But the fact is, we live in different times now.

America was just beginning to move off the gold standard in those days, so the spending restraints it engendered still exerted force. And even with the Vietnam War and the recently initiated Great Society to pay for, the U.S. debt-to-GDP ratio was only about 35% in 1971. It’s now about 105%. The last vestiges of the gold standard are long gone.

Most importantly, it was a time before central banks had so much influence over markets. Central banks like the Fed were fixated on macroeconomic stability, not the performance of the stock market.

We live in a completely new monetary and fiscal world today, especially after the 2008 financial crisis. The Fed’s balance book went from about $800 billion pre-crisis to a gargantuan $4.5 trillion. That type of move was completely unprecedented.

Now the Fed is raising interest rates and reducing its balance sheet in order to return to “normal.”

So far, the Fed has raised rates seven times since December 2015. Under Jerome Powell, it has raised rates twice.

Now, the Fed forecasts another two rate hikes by the end of the year, once in September and then December. While it’s likely the second one is much lower than the first, the fact is that both are in play.

Markets are currently wondering if there will be a “Powell put.” During Alan Greenspan’s reign at the Federal Reserve, a phenomenon dubbed the “Greenspan put” prevailed.

Wall Street’s expectation was that if the stock market wobbled, the Fed would save the day by cutting rates (creating money and the need for speculators to then get returns from the stock rather than the bond market).

The Fed has largely played by a similar “put” playbook for the past decade, with low rates and a $4.5 trillion book of assets courtesy of QE. The mainstream media is slow to recognize this. Only now are they beginning to wonder whether the Fed will do what’s needed to lift the markets when it becomes necessary.

But, as a recent Bloomberg suggests, Powell is facing the same pressure to have his own put, “except this time it would be tied to the bond market.” Now, policy makers are increasingly concerned about …read more

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