6.6 million fresh unemployment claims this week. 3.3 million last week.
Combined you have a cataclysm of 9.99 million claims within two weeks.
“No words for this,” writes Pantheon Macroeconomics chief economist Ian Shepherdson — speechless, gobsmacked, floored, broken beyond endurance.
“What we are going through now dwarfs anything we’ve ever seen,” laments Heidi Shierholz, the Economic Policy Institute’s senior economist — “including the worst weeks of the Great Recession.”
Alas, the lady is correct.
This week’s unemployment figure rises 10 times higher than any week between 2007 and 2009.
In all, the United States economy shed 15 million jobs in that 18-month span. But at the present gallop… the economy will give up 15 million jobs in weeks.
Inconceivable — but there you are.
“The great financial crisis happened over a number of years,” says Wharton finance professor Susan Wachter. “This is happening in a matter of months — a matter of weeks,” she adds.
The New York Times estimates the unemployment rate is presently 13% and “rising at a speed unmatched in American history.”
You may wish to consider the reliability of the source. The true rate may be lower. But this you also must consider:
It may be higher.
And the Congressional Budget Office presently projects second-quarter GDP to plummet to an annualized -28%. That is correct.
One small example:
National box office sales ran to $204 million one year ago this week. And one year later?
$5,179 — essentially a $204 million collapse of the cinema industry.
The travel, retail and restaurant and ale house industries confront similar hells.
An economy such ours is like a long stretch of dominoes. Knock one down and the others go over…
The suddenly unemployed may lack the wherewithal to make rent. The landlord who depends on it may be unable to meet his own obligations. So with the person above him… and the next above him… all the way up the ladder.
A fellow going by the name of Mark Zandi is Moody’s Analytics chief economist. His researches indicate perhaps 30% of Americans with home loans — some 15 million of them — could fall into arrears if the economy remains shuttered through summer.
Meantime, the freshly unemployed send additional dominoes toppling…
The unemployed store manager can no longer afford the auto he planned to purchase. And so the automobile salesman goes without. His planned vacation he must cancel. He further abandons plans to renovate the kitchen or add the extension to his home.
The airline and hotel people then must suffer. As must the carpenter who would have worked the job. And the lumber men who would have sold the wood. As must the gasoline vendor who would have fueled its transportation.
And so on and so on, one domino knocking down the next in line, all the way through.
Multiply the business by 10 million, 15 million — 20 million — and you face a situation.
“No words for this.”
The Federal Reserve estimates the unemployment number may scale an unspeakable 47 million.
We find limited solace knowing the Federal Reserve nearly always botches the numbers. It is nonetheless a bleak arithmetic we confront.
The United States government is attempting to choke off the hemorrhaging with payments to businesses and the unemployed. But it will prove dreadfully unequal to its task.
What is more, multiple sources report some checks may not mail for 20 weeks — five months.
How will the unemployed with no savings rub along for five months?
Tens of thousands were driven to suicide during the Great Depression. Over 10,000 took the identical route out of the Great Recession.
Another suicidal wave — a large one — will wash on over should present conditions extend too long.
But you may be relieved to learn that the Federal Reserve is on the job…
It has expanded its balance sheet $1.6 trillion since mid-March alone. It required 15 months to attain that same figure during QE3.
And the balance sheet presently bulges to $6 trillion — a 60% increase in a mere six months.
One staff member of the Federal Reserve, meantime, believes it will swell to $9 trillion by year’s end.
We place high odds that it will expand further yet.
Well and truly… this is a time of superlatives.
But how much can the balance sheet expand… before bursting at the seams?
No one truly knows. But do we wish to find out?
Besides, its previous manias of balance sheet inflating did little for the real economy, the economy of things.
There is little reason — none, that is — to expect a different outcome now.
Here is another superlative:
The Dow Jones has endured its deepest first-quarter plunge in its entire 124 years. And heavier losses await, depend on it.
And so here we are, trapped… the devil to one side… the deep blue sea to the other.
“No words for this.”
Managing editor, The Daily Reckoning
“If this doesn’t work,” wonders Seema Shah, Principal Global Investors central strategist…
“This” is of course the Federal Reserve’s desperate harum-scarum yesterday afternoon.
Mr. Powell and crew knocked down rates one entire percentage point. The federal funds rate now squats between 0% and 0.25% — zero essentially.
And so as a dog returneth to its vomit… the Federal Reserve returneth to zero.
The scoundrels of Zero Hedge label it part of the “the biggest emergency ‘shock and awe’ bazooka in Fed history.”
But we are not shocked. Nor are we awed.
Our only surprise is the scheduling — our hazard was a return to zero later this week.
Yet the business was so urgent, all hanging in balance… it could not even wait for this week’s formal FOMC confabulation (now canceled).
Not Just Rate Cuts
We were further informed yesterday that quantitative easing (QE) is commencing anew.
The Federal Reserve will purchase “at least” $500 billion of United States Treasuries — and $200 billion of mortgage-backed securities — $700 billion in all.
We are betting high on “at least.” This merely represents the opening installment.
The Federal Reserve is also extending fresh ratlines — our apologies, swap lines — to foreign central banks.
That is intended to maintain dollar liquidity against the global coronavirus delirium presently obtaining.
Greg McBride, Bankrate chief financial analyst, in summary:
The Fed is dusting off the financial crisis playbook, returning to bond buying, coordinating with other global central banks to provide access to U.S. dollar liquidity, cutting interest rates to zero and opening the Fed’s discount window to ensure the flow of credit through banks to consumers and businesses.
“It’s really great for our country,” gushed the president.
But is it? Did yesterday’s “shock and awe” bazooka blast score a hit?
It did, yes. A direct hit — to the wrong side.
Shocked and Awed…
Stock futures went careening last evening, so shocked, so awed were they. They promptly went “limit down.”
The future arrived this morning at 9:30 Eastern. And markets remained shocked and awed…
The Dow Jones plunged nearly 10% from the opening whistle. The S&P and Nasdaq followed in lockstep.
Once again the breakers tripped… and trading was suspended 15 minutes.
“The central banks threw the kitchen sink at it yesterday evening, yet here we are (with deep falls in stock markets),” yelled Societe Generale strategist Kit Juckes.
“This is what panic looks like,” hollered Patrick Healey, president of Caliber Financial Partners.
Yet we are not surprised. Markets can see the beads of perspiration forming about Mr. Powell’s forehead. Markets are flighty birds easily frightened.
And what telegraphs fear more than a “shock-and-awe bazooka”?
The shock and awe deepened throughout the day…
Another “Worst Day Since Black Monday”
We grow weary of repeating it. But the Dow Jones once again suffered its mightiest whaling since Black Monday, 1987.
The index gushed another 2,997 points today to close at 20,188 — giving back another 12.93%.
The S&P lost 325 points, or 11.98%. The Nasdaq, 970 points and 12.32%
And so additional trillions of stock market wealth vanish into the electricity, lost.
Losses accelerated towards day’s end. Why?
Late this afternoon the president said the “worst of the outbreak” could stretch into August.
Fear gauge VIX went skyshooting to 83 today — within shouting distance of its record 90 from October 2008.
And so we return to our opening question:
“If this doesn’t work… what will?”
Alas, the question is easier asked than answered…
“Just Close the Whole Thing up”
One CNBC host even suggests shuttering Wall Street. Shrieks Mr. Scott Wapner:
How are folks supposed to focus on trading stocks when they’re dealing with nervous kids out of school, spouses working from home and scrambling to keep up, all while managing their own anxieties? Just close the whole thing up and start again later. It’s the right thing to do.
It may be the right thing to do or the wrong thing to do. Regardless, it has been done before.
The stock market was suspended 10 days during the panic of 1873 — and four entire months at the outset of the First World War.
Examples abound. Most recently in October 2012 when a hurricane, Sandy by name, closed the market two days.
But now the Federal Reserve confronts a different variety of hurricane…
“Very Serious Trouble”
“The Fed is now in very serious trouble,” gulps Graham Summers of Phoenix Capital — whom we recently introduced to you, our reader.
“Put another way,” he continues…
The Fed has gone truly NUCLEAR with monetary policy… and the market is STILL imploding…
The Fed can do NOTHING to stop this. No amount of rate cuts or stimulus from the Fed will make people want to go out and spend money if the country is on lockdown/facing a health crisis triggered by a pandemic.
The country is indeed verging upon a lockdown of sorts…
The Centers for Disease Control and Prevention has recommended that all sizable gatherings and events be “postponed” for the following eight weeks.
New York, New Jersey and Connecticut — home to a fair number of Americans — have taken aboard its counsel.
All gatherings of 50 persons or greater thus are banned.
We remind you that restaurants frequently entertain crowds exceeding 50. As do other dens of vice including drinking establishments, casinos, theaters, concert halls, ballparks, gymnasiums and houses of worship — to name some.
Houses of ill repute, we assume, must ration admission ruthlessly… else court the wrath of the law.
New Jersey residents are now confined to barracks between 8 p.m. and 5 a.m. All travel is “strongly discouraged,” save in emergency.
Other States Follow
Meantime, Illinois bars and restaurants will close to the public beginning tonight. Their doors will not reopen until March 30.
Delivery and takeout services are available, however, as they are in New York, New Jersey and Connecticut.
Washington state has followed their example. As has the great state of Michigan. As has our own state of Maryland.
Massachusetts has exceeded even CDC’s draconian limit of 50. Gatherings of 25 or more are presently forbidden in this, the cradle of American liberty.
Meantime, over 30 million students in at least 31 states are exiled from the classroom. The Ohio governor has suggested his state’s may not come back until autumn.
Even the Supreme Court of the United States will no longer hear arguments — until early April at the earliest.
Do not forget, six of nine justices are aged 65 or above. And the coronavirus harbors a savage antagonism toward the elderly.
Thus a grateful nation is insured against a potential holocaust of justices.
A Ban on All Air Travel?
And now… rumors are on foot that a complete ban on domestic air travel is under active consideration.
We have assigned our men to investigate.
Regardless, the airlines are suffering damnably. Delta Air Lines claims conditions are worse than even the Sept. 11 afterblow.
“The speed of the demand fall-off is unlike anything we’ve seen,” laments Chief Executive Officer Ed Bastian.
The airline has gutted operations some 40%. And 300 planes are tied down to the tarmacs.
Meantime, all American cruise liners will remain tied up to the piers for 60 days.
A bailout of the air and cruise lines is on the way — depend on it.
So too, perhaps, is a bailout of the American citizen…
$1,000 Check Every Month
Sen. Mitt Romney (R-Utah) proposes to hand every American adult $1,000 per month so long as the coronavirus rages.
Reads a press release under his name:
Every American adult should immediately receive $1,000 to help ensure families and workers can meet their short-term obligations and increase spending in the economy.
Of course, the money must originate somewhere… as the government has none of its own.
In many cases it would amount to lifting money out of a fellow’s back pocket and lowering it into his front pocket.
But crises bring forth ideas that would never get a hearing otherwise. Many are of course lunatic.
Americans would acclimate rapidly to the monthly stipend. Who would take it away from them once the all clear signal goes out?
This is an election year, do not forget, when votes go up for sale. A monthly check can purchase many.
“The Worst Is yet Ahead for Us”
But just when might the coronavirus lose its stranglehold on American life?
“The worst is yet ahead for us,” warns Dr. Anthony Fauci of the National Institutes of Health.
We hope the fellow is mistaken.
We further hope the worst is behind for markets.
But we fear the worst is ahead for the economy.
And so again we ask:
“If this doesn’t work… what will?”
Managing editor, The Daily Reckoning
The market swung from record heights to “correction” within a mere six days.
Only once in history has it plunged so violently so swiftly. In 1928 that was — not long before the great gale of ’29 blew on through.
The market has since endured 25 “swift” corrections over 75 years.
These are not extended, orderly retreats. They are rather lightning hysterias packing ferocious wallop.
On average — the phrase is necessary — you can therefore expect one of these frantic corrections every three years.
Yet four of these 25 hair-raisers have shaken Wall Street since August 2015.
That is greater than once per year — again, if you take the average.
(We doff our cap to macroeconomic analyst “The Heisenberg” for supplying the data.)
We must conclude the market is increasingly vulnerable to these sudden and violent shakings.
But why? Why the greater frequency since 2015?
Today we seek to drive a light through the puzzle… and penetrate the mystery.
But first, how did battered markets open the fresh week?
Stocks Roar Back
Dow Jones futures swung dizzily in overnight trading Sunday — over 1,000 points peak to trough.
Greater volatility, that is, was likely on tap this week.
But like a careening drunk who grabs something sturdy on the way down… the stock market steadied itself today.
Steadied itself? It went bounding up the nearest tree…
The Dow Jones vaulted 1,294 points today, regaining a healthful chunk of last week’s losses.
The S&P recaptured 136 points; the Nasdaq, 385.
Market-maker Apple recovered 6% this morning. The “FAANG” stocks also climbed to their feet today.
The Return of the “Dip Buyers”
Thus the “dip buyers” peeked out from their bunkers today… and concluded it was safe to come out.
Explains Brent Schutte, chief investment strategist at Northwestern Mutual:
“The sell-off was so fierce last week that you do have some buy-the-dip investors emerging.”
We suppose the immediate prospects of rate cuts put some heart into them.
Markets presently give 100% odds of a March rate cut. And not a 25-basis point rate cut… but a thumping 50-basis points.
And an April rate cut? Those odds exceed 70%.
Yet the bond market dismissed entirely the promise of additional empty fireworks…
The 10-year Treasury yield once again plummeted to record depths today, to 1.065% — a sweet distance below its July 2016 low of 1.27%.
Gold, meantime, surged $22.30 today after last week’s savaging. Perhaps it is poised to reclaim its “safe haven” mantle.
But returning to our central question… why are corrections growing more violent?
A Likely Answer
We believe “passive investing” holds the answer — or much of the answer.
As we have written before…
After the 2008 near-collapse, the water management team at the Federal Reserve inundated markets with oceans of liquidity.
The biblical-level flooding knocked down existing financial signposts. And “fundamentals” no longer seemed to matter.
The tide was rising — and all boats with it.
“Active” asset managers casting the water for losers hauled up empty nets.
Some 90% of all actively managed stock funds have underperformed their index during the last 10 years.
“Passively” managed funds — on the other hand — make no effort to pinpoint winners.
They instead track an overall index or asset category, not the individual components.
They are “passive” because they sit back on their oars… and let the flowing tide lift their boat.
Passive Investing Has Yielded Handsome Dividends
This strategy has yielded handsome dividends this past decade of generally rising waters. Tim Decker, president and CEO of ISI Financial Group, explains:
Passive management came into its own during the long bull market that started in late 2009, after the market had collapsed amid the financial crisis in 2007–08. Money had been flowing from active to passive vehicles in the preceding years, and investors — disillusioned by their losses in the crisis and the high fees they had paid — started turning to passive vehicles even more. That trend has continued to this day.
Passive investing has increased from 15% of funds in 2007 to perhaps half today.
Wall Street has poured into titanics like Facebook, Apple, Alphabet (Google), Netflix and Microsoft.
Their combined tonnage presently exceeds 10% of the stock market’s overall $34 trillion heft.
As long as the tides continue rising….all is peace.
But here is the risk:
When the tide recedes… that same handful of stocks can wash the market instantly out to sea.
For when they move, the market goes with them.
Panic selling begets panic selling. And none knows how far the waters might drop.
All Heading for the Exits at Once
Explains Jim Rickards:
In a bull market, the effect is to amplify the upside as indexers pile into hot stocks like Google and Apple. But a small sell-off can turn into a stampede as passive investors head for the exits all at once without regard to the fundamentals of a particular stock…
Or as analysts Lance Roberts and Michael Lebowitz of Real Investment Advice have it:
When the “herding” into ETFs begins to reverse, it will not be a slow and methodical process but rather a stampede with little regard to price, valuation or fundamental measures.
Importantly, as prices decline it will trigger margin calls, which will induce more indiscriminate selling… As investors are forced to dump positions… the lack of buyers will form a vacuum causing rapid price declines [that] leave investors helpless on the sidelines watching years of capital appreciation vanish in moments.
“Fast, Furious and Without Remorse”
These fellows remind us that investors hemorrhaged 29% of their capital over a three-week span in 2008 — and 44% over three months.
“This is what happens during a margin liquidation event,” they conclude.
“It is fast, furious and without remorse.”
Last week’s selling was fast… furious… and without remorse.
Microsoft plunged over 20% at one point last week, for example — as did Apple. Thus they were dragged into bear market regions, however briefly… defined as a 20% drop from their recent heights.
Facebook and Alphabet, meantime, posted double-digit losses.
And given their overall tug on markets… last week witnessed a thumping correction.
Why Should They Stop Now?
Again, only in 1928 did stocks plunge from record heights into correction in merely six days.
Goldman, in summary:
“Narrow bull markets eventually lead to large drawdowns.”
We do not know which direction the markets will take next. And we will hazard no prediction — as we have limited appetite for crow.
We will only say that deceased felines have been known to bounce.
But to our notion, passive investing at least partly explains these intensifying market spasms.
And we expect more of them.
Our concern is that the market may fall into spasm one day… and fail to come out.
Managing editor, The Daily Reckoning
Is there gold price manipulation going on? Absolutely. There’s no question about it. That’s not just an opinion.
There is hard statistical evidence to make the case, in addition to anecdotal evidence and forensic evidence. The evidence is very clear, in fact.
I’ve spoken to members of Congress. I’ve spoken to people in the intelligence community, in the defense community, very senior people at the IMF. I don’t believe in making strong claims without strong evidence, and the evidence is all there.
I spoke to a PhD statistician who works for one of the biggest hedge funds in the world. I can’t mention the fund’s name but it’s a household name. You’ve probably heard of it. He looked at COMEX (the primary market for gold) opening prices and COMEX closing prices for a 10-year period.
He was dumbfounded.
He said it was is the most blatant case of manipulation he’d ever seen. He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits.
He said statistically that’s impossible unless there’s manipulation occurring.
I also spoke to Professor Rosa Abrantes-Metz at the New York University Stern School of Business. She is the leading expert on globe price manipulation. She has actually testified in gold manipulation cases.
She wrote a report reaching the same conclusions. It’s not just an opinion, it’s not just a deep, dark conspiracy theory. Here’s a PhD statistician and a prominent market expert lawyer, expert witness in litigation qualified by the courts, who independently reached the same conclusion.
How do these manipulations occur?
Currently the price of gold is set in two places. One is the London spot market, controlled by six big banks including Goldman Sachs and JPMorgan. The other is the New York gold futures market controlled by COMEX, which is governed by its big clearing members, also including major western banks.
In effect, the big western banks have a monopoly on gold prices even if they do not have a monopoly on physical gold.
The easiest way to perform paper manipulation is through COMEX futures. Rigging futures markets is child’s play. You just wait until a little bit before the close and put in a massive sell order. By doing this you scare the other side of the market into lowering their bid price; they back away.
That lower price then gets trumpeted around the world as the “price” of gold, discouraging investors and hurting sentiment. The price decline spooks hedge funds into dumping more gold as they hit “stop-loss” limits on their positions.
A self-fulfilling momentum is established where selling begets more selling and the price spirals down for no particular reason except that someone wanted it that way. Eventually a bottom is established and buyers step in, but by then the damage is done.
Futures have a huge amount of leverage that can easily reach 20 to 1. For $10 million of cash margin, I can sell $200 million of paper gold.
Hedge funds are now large players in the gold market. To a hedge fund, gold may be an interesting market in which to deploy its trading style. To them, gold is just another tradable commodity. It could just as well be coffee beans, soybeans, Treasury bonds, or any other traded good.
Hedge funds use what are called “stop-loss” limits. When they establish a trading position, they set a maximum amount they are willing to lose before they get out. Once that limit is reached, they automatically sell the position regardless of their long-term view of the metal.
Perhaps they don’t even have a long-term view, just a short-term trading perspective. If a particular hedge fund wants to manipulate the gold market from the short side, all it has to do is throw in a large sell order, push gold down a certain amount, and once it hits that amount, these stops are triggered at the funds that are long gold.
Once one hedge fund hits a stop-loss price, that hedge fund automatically sells. That drives the price down more. The next hedge fund hits its stop-loss. Then it sells too, driving the price down again. Selling gathers momentum, and soon everyone is selling.
Another way to manipulate the price is through gold leasing and “unallocated forwards.”
“Unallocated” is one of those buzzwords in the gold market. When most large gold buyers want to buy physical gold, they’ll call JPMorgan Chase, HSBC, Citibank, or one of the large gold dealers.
They’ll put in an order for, say, $5 million worth of gold. The bank will say fine, send us your money for the gold and we’ll offer you a written contract in a standard form. Yet if you read the contract, it says you own gold on an “unallocated” basis. That means you don’t have designated bars.
There’s no group of gold bars that have your name on them or specific gold bar serial numbers that are registered to you.
In practice, unallocated gold allows the bank to sell the same physical gold ten times over to ten different buyers.
It’s no different from any other kind of fractional reserve banking. Banks never have as much cash on hand as they do deposits. Every depositor in a bank thinks he can walk in and get cash whenever he wants, but every banker knows the bank doesn’t have that much cash. The bank puts the money out on loan or buys securities; banks are highly leveraged institutions.
If everyone showed up for the cash at once, there’s no way the bank could pay it. That’s why the lender of last resort, the Federal Reserve, can just print the money if need be. It’s no different in the physical gold market, except there is no gold lender of last resort.
Banks sell more gold than they have. If every holder of unallocated gold showed up all at once and said, “Please give me my gold,” there wouldn’t be nearly enough to go around. Yet people don’t want the physical gold for the most part.
There are risks involved, storage costs, transportation costs, and insurance costs. They’re happy to leave it in the bank. What they may not realize is that the bank doesn’t actually have it either.
Gold holders should expect these games to continue until a fundamental development drives the price to a permanently higher plateau.
How does the individual investor stand up against such forces?
In the short run, you can’t beat them, but in the long run, you always will, because these manipulations have a finite life.
Eventually the manipulators run out of physical gold, or a change in inflation expectations leads to price surges even governments cannot control. There is an endgame.
History shows manipulations can last for a long time yet always fail in the end. They failed in the 1960s London Gold Pool, with the United States dumping in the late 1970s, and the central bank dumping in the 1990s and early 2000s. The gold price went relentlessly higher from $35 per ounce in 1968 when the London Gold Pool failed to $1,900 per ounce in 2011, the all-time high.
Price manipulation always fails. And the dollar price of gold will resume its march higher. The other weakness in the manipulation schemes appears in the use of paper gold through leasing, hedge funds, and unallocated gold forwards.
These techniques are powerful. Still, any manipulation requires some physical gold. It may not be a lot, perhaps less than 1% of all the paper transactions, yet some physical gold is needed. The physical gold is also rapidly disappearing as more countries are buying it up. That puts a limit on the amount of paper gold transactions that can be implemented.
My advice to investors is that it’s important to understand the dynamics behind gold pricing. Understanding these dynamics lets you see the endgame more clearly and supports the rationale for owning gold even when short-term price movements are adverse.
Gold will win in the end.
for The Daily Reckoning
Investment in mineral exploration in Mexico hit a 12-year low last year, due mainly to social conflicts that forced some companies to halt operations, according to a report published this week by the country’s mining chamber Camimex.
Around $383 million was invested in exploration in Mexico last year, down 37.4% from the $612 million registered in 2017.
Foreign and local companies invested about $383 million exploring in Mexico in 2018, down 37.4% from the $612 million registered in 2017, official data shows. The sum also represents a 67.1% drop from an all-time-high of almost $1.2 billion reached in 2012.
While juniors’ difficulties to access finance also played a role, the Canadian Chamber of Commerce (Cancham) in Mexico says actions such as the one-month blockade of Newmont Goldcorp’s Peñasquito gold mine and the ongoing obstruction to MAG Silver’s project in Chihuahua have weighed in.
"In general, the economy of extortion is a factor of uncertainty for mining activity," Cancham’s president, Armando Ortega, told El Economista.
Only about 25% of Mexico, the world’s No.1 silver producer, has been explored for mineral and oil riches so far.
The figure may not grow much in the next few years, as President Andres Manuel López Obrador has promised to increase scrutiny on miners’ environmental practices and treatment of Indigenous people.
Roughly, 70% of foreign-owned mining companies operating in Mexico are based in Canada, according to Global Affairs Canada.
This weekend, the stock market bull turned 10 years old, handing investors more than 17% in annualized total returns along the way.
According to my old S&P coworker, Howard Silverblatt, that performance is more than three times better than the annualized return from the end of 1999 (5.43%) and almost twice as good as the return since 1989 (9.64%).
Of course, plenty of people stayed on the sidelines and lots of experts encouraged them to do so.
This is pretty common.
When shares of U.S. companies are going up, they say stocks are getting too expensive.
When the market is falling, they say it’s too dangerous to jump in because more downside is certain.
And when stocks are going sideways, they repeatedly say the action proves investing in U.S. shares is an outdated strategy.
This kind of hyperbole makes for interesting reading, but it can also end up dooming your nest egg to a life of anemic gains. Or worse, repeated losses.
So today, I want to talk about three major market myths that continually float around out there…
Myth 1:Buying and Holding Good Stocks Doesn’t Work
Market watchers have loved saying “buy and hold” approaches don’t work for as long as stocks have been trading.
Traditionally, you would hear this from stock brokers who stood to make a lot more in commissions by encouraging their clients to trade in and out of positions. But even in today’s world of low-cost brokerage accounts, there are still plenty of experts telling investors that long-term investing is a stupid move.
I agree that a buy-and-hold approach isn’t ideal for some investors and there are plenty of active trading strategies that work well.
However, the idea that you can’t make very good money by sticking with big companies and holding them for years on end is patently false… especially if their stocks pay nice dividends.
Here’s an illustration that will probably surprise you…
The top three contributors to the S&P 500’s performance during this bull market have been Apple, Microsoft, and JPMorgan.
No real surprises there.
But in fourth place? General Electric.
Yes, the same General Electric that has been absolutely decimated in recent times!
Despite all that pain, the fact that the stock was even lower in the throes of the Great Recession – along with all the dividends it paid along the way – still manage to put its total return toward the very top of the list.
So you can make LOTS of money by simply buying solid dividend payers at fair prices and then doing nothing more for years at a time.
Of course, a lot of folks will say it’s impossible to find good values now that the market has run up so much over the last ten years.
Myth 2: Buying Stocks Right Now Is a Sucker’s Move
The chorus of stock market naysayers grows with every new all-time high in the S&P 500. And to be sure, we are no longer seeing a huge smorgasbord of undervalued companies out there.
At the same time, you CAN still find good bargains. In fact, some of my favorite blue chip names have actually been going down even as hot names continue to rise on hype.
What you have to remember is that generalizations like “stocks are now overvalued” don’t tell the full story. There are many thousands of individual companies trading out there – each of which needs to be evaluated on a case-by-case basis.
Just because the market is sitting at some particular P/E ratio doesn’t mean there isn’t a small tech firm experiencing tremendous growth or a large retailer being unfairly punished because of its latest earnings report.
In addition, there are plenty of ways to play stocks more aggressively or profit from short-term swings.
The key is determining your goals and then sticking with the plan you’ve made.
Which brings me to one last major market myth…
Myth 3: You Can’t Make Money If Stocks Aren’t Moving Up
Nothing could be further from the truth.
As I’ve already explained a million times, you can easily collect solid dividend checks month in and month out no matter what the underlying stock is doing (or not doing).
In addition, the market is always moving at least a little bit every day. So you can also use advanced timing tools to play the many peaks and valleys that occur within a longer period of sideways action.
Plus, there are two more ways to make money from stocks during sideways – or even down – markets:
For starters, you can sell options to generate additional income from stocks you already own or even on stocks you’d like to own.
You can also aim to profit as individual stocks – or the broad market – falls. And you can do this by buying put options… short selling… or simply using inverse exchange-traded funds (ETFs).
So the bottom line is that there are countless ways to make money from the stock market, especially if you choose to employ a combination of the ideas I touched on in today’s article.
Really, the only bad approach is letting others scare you away from one opportunity after another.
To a richer life,
— Nilus Mattive
Editor, The Rich Life Roadmap
Fed Chair Jay Powell just sent the most powerful signal from the Fed since March 2015.
He has pretty much taken a March 2019 rate hike off the table until further notice. At a forum hosted by the American Economic Association in Atlanta last Friday, Powell used the word “patient” to describe the Fed’s approach to the next interest rate hike.
When Powell did this, he was reading from a script of prepared remarks in what was otherwise billed as a “roundtable discussion.”
This is a sign that Powell was being extremely careful to get his words exactly right. When Powell said the Fed would be “patient” in reference to the next rate hike, this was not just happy talk. The word “patient” is Fed code for “no rate hikes until we give you a clear signal.”
This interpretation is backed up by the Fed’s past use of verbal cues to signal ease or tightening in lieu of actual rate hikes or cuts. Prior to March 2015, the Fed consistently used the word “patient” in their FOMC statements.
This was a signal that there would not be a rate hike at the next FOMC meeting. Investors could do carry trades safely. Only when the word “patient” was removed was the Fed signaling that rate hikes were back on the table.
In that event, investors were being given fair warning to move to risk-off positions.
In March 2015, Yellen removed the word “patient” from the statement. In fact, the first rate hike (the “liftoff”) did not happen until December 2015, but the market was on notice through the June and September 2015 FOMC meetings that it could happen.
Now, for the first time since 2015, the word “patient” is back in the Fed’s statements, which means no future Fed rate hikes without fair warning.
For now, the Fed is rescuing markets with a risk-on signal. That's why the market rallied last Friday. But we're not out of the woods by any means.
The U.S. stock market had already anticipated the Fed would not raise rates in March. Friday’s statement by Powell confirms that, but this verbal ease is already priced in. As usual, the markets will want some ice cream to go with the big piece of cake they just got from Powell.
The next FOMC meeting is Jan. 30. If the Fed does not repeat the word “patient,” markets could be in for an extremely negative reaction.
Looking ahead to rest of 2019, what are my models and methods telling us today about the prospects for the economy and markets?
The answer to that question requires an overview of many markets and sovereign economies around the world. While forecasts for China, the U.S. and Europe may differ in many particulars, what they have in common is interconnectedness.
For example, a slowdown in China due to excessive debt and trade wars can reduce exports from Europe. In turn, reduced European exports can slow down European purchases of raw materials and other inputs and lead to a weaker euro.
The weaker euro can translate into a stronger dollar, which causes disinflation in the U.S. That disinflation can increase the real value of debt burdens in the U.S. if nominal growth is lower than the increase in the nominal deficit.
In other words, what happens in China does not stay in China. The world is densely connected. Any sound analysis must consider the ripples spreading out from any one factor.
We need to look at the synchronized global slowdown, the Fed’s misguided policies, currency wars, trade wars and political dysfunction in the U.S. to arrive at conclusions and forecasts for the U.S. and beyond.
All this takes place against a backdrop of mounting global debt.
According to the Institute of International Finance (IIF), it required a record $8 trillion of freshly created debt to create just $1.3 trillion of global GDP. The trend is clear. The massive debts intended to achieve growth are piling on every day. Meanwhile, many of the debts taken on since 2009 are still on the books.
This is a crisis waiting to happen. The combination of slow or negative growth and unprecedented debt is a recipe for a new debt crisis, which could easily slide into another global financial crisis.
The Fed will have to pivot back to loosening, including a possible reintroduction of quantitative easing. But by then, it may be too late.
Below, I show you why the economic head winds are getting stronger as we begin 2019. What can you do to prepare? Read on.
for The Daily Reckoning
“Is there a real estate bubble?” That’s the question I’m asked repeatedly. When I reply honestly, “I hope so,” the person asking me will sometimes get angry.
“You want the market to crash?” asked one young man incredulously, at an event where I was a featured speaker.
“Yes,” I replied. “I love market crashes.”
Apparently not wanting to hear the rest of my explanation, he stomped off muttering something like “moron.”
I’ve covered this subject of booms, busts, and bubbles before in my columns and books, but since the world seems to be on the brink of so many different booms and busts, I think it’s a good time to revisit it.
Over the years, I have read several books on the subject of booms and busts. Almost all of them cover the Tulip Mania in Holland, the South Seas Bubble, and, of course, the Great Depression. One of the better books, Can It Happen Again?, was written in 1982 by Nobel Laureate Hyman Minsky. In this book, he described the seven stages of a financial bubble. They are:
Stage 1: A Financial Shock Wave
A crisis begins when a financial disturbance alters the current economic status quo. It could be a war, low interest rates, or new technology, as was the case in the dot-com boom.
Stage 2: Acceleration
Not all financial shocks turn into booms. What’s required is fuel to get the fire going.
After 9/11, I believe the fuel in the real estate market was a panic as the stock market crashed and interest rates fell. Billions of dollars flooded into the system from banks and the stock market, and the biggest real estate boom in history took place.
Stage 3: Euphoria
We have all missed booms. A wise investor knows to wait for the next boom, rather than jump in if they’ve missed the current one. But when acceleration turns to euphoria, the greater fools rush in.
By 2003, every fool was getting into real estate. The housing market became the hot topic for discussion at parties. “Flipping” became the buzzword at PTA meetings. Homes became ATM machines as credit-card debtors took long-term loans to pay off short-term debt.
Mortgage companies advertised repeatedly, wooing people to borrow more money. Financial planners, tired of explaining to their clients why their retirement plans had lost money, jumped ship to become mortgage brokers. During this euphoric period, amateurs believed they were real estate geniuses. They would tell anyone who would listen about how much money they had made and how smart they were.
Stage 4: Financial Distress
Insiders sell to outsiders. The greater fools are now streaming into the trap. The last fools are the ones who stood on the sidelines for years, watching the prices go up, terrified of jumping in. Finally, the euphoria and stories of friends and neighbors making a killing in the market gets to them. The latecomers, skeptics, amateurs, and the timid are finally overcome by greed and rush into the trap, cash in hand.
It’s not long before reality and distress sets in. The greater fools realize that they’re in trouble. Terror sets in, and they begin to sell. They begin to hate the asset they once loved, regardless of whether it’s a stock, bond, mutual fund, real estate, or precious metals.
Stage 5: The Market Reverses, and the Boom Turns into a Bust
The amateurs begin to realize that prices don’t always go up. They may notice that the professionals have sold and are no longer buying. Buyers turn into sellers, and prices begin to drop, causing banks to tighten up.
Minsky refers to this period as “discredit.” My rich dad said, “This is when God reminds you that you’re not as smart as you thought you were.” The easy money is gone, and losses start to accelerate. In real estate, the greater fool realizes he owes more on his property than it’s worth. He’s upside down financially.
Stage 6: The Panic Begins
Amateurs now hate their asset. They start to dump it as prices fall and banks stop lending. The panic accelerates. The boom is now officially a bust. At this time, controls might be installed to slow the fall, as is often the case with the stock market. If the tumble continues, people begin looking for a lender of last resort to save us all. Often, this is the central bank.
The good news is that at this stage, the professional investors wake up from their slumber and get excited again. They’re like a hibernating bear waking after a long sleep and finding a row of garbage cans, filled with expensive food and champagne from the party the night before, positioned right outside their den.
Stage 7: The White Knight Rides in
Occasionally, the bust really explodes, and the government must step in—as it did in the 1990s after the real estate bust when it set up an agency known as the Resolution Trust Corporation, often referred to as the RTC.
As it often seems, when the government does anything, incompetence is at its peak. The RTC began selling billions of dollars of unbelievable real estate for pennies on the dollar. These government bureaucrats had no idea what real estate is worth.
In 1991, my wife Kim and I moved to Phoenix, AZ, and began buying all the properties we could. Not only did the government not want anything to do with real estate, amateur investors and the greater fools hated real estate and wanted out.
People were actually calling us and offering to pay us money to take their property off their hands. Kim and I made so much money during this period of time we were able to retire by 1994.
The Best Time to Buy
Take market crashes. I love them because that’s the best time to buy—finding true value is a lot easier during such periods. And since so many people are selling, they’re more willing to negotiate and make you a better deal. Although a crash is the best time to buy, the market’s high pessimism also makes it a tough time to do so.
I remember buying gold at $275 an ounce in the late 1990s. Although I knew it was a great value at that price, the so-called experts were calling gold a “dog” and advised that everyone should be in high-tech and dot-com stocks.
Today, with gold above $1200 an ounce, those same experts are now recommending gold as a percentage of a well-diversified portfolio. Talk about expensive advice.
My point is that this current period is a tough time to buy or sell. Real estate is high, interest rates are high—and climbing, the stock market is a roller coaster, the U.S. dollar is low, gold is high, and there’s a lot of money looking for a home.
So, the lesson is: Now, more than ever, it’s important to focus on value, not price. When prices are low, finding value is easy.
When prices are high, value is a lot harder to find—which means you need to be smarter, more cautious, and resist your knee-jerk reactions. A final word from Warren Buffett: “It’s only when the tide goes out that you learn who’s been swimming naked.”
Now you know why I say, “I love market crashes.”
Although my wife and I continue to invest, we’re more like hibernating bears waiting for the party to end. As Warren Buffett says, “We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful.”
So instead of asking, “Is it a bubble?” it’s more financially intelligent to ask, “What stage of the bubble are we in?” Then, decide if you should be fearful, greedy, or hibernating.
Editor, Rich Dad Poor Dad Daily