The Case Against Economists

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Dear Reader,

Whenever despair slumps our shoulders and the sorrows of the world gnaw our liver… we can rely on CNBC to bring us up:

“Latest Data Show the Economy Ended 2019 on a Strong Note, Putting Recession Fears to Bed.”

Thus we are caressed, soothed, cheered, lifted.

And mortified.

When fear goes to bed… we vault instantly up from our own, hemorrhaging icy sweat.

That is because danger is highest when the guard is lowest — when fear dozes and snoozes.

A Jinx?

CNBC continues in the same lovely, terrifying vein:

The fourth-quarter growth scare is a thing of the past, as the U.S. economy looks set to close the books on 2019 with a solid rise.

Manufacturing and trade reports Tuesday confirmed that GDP is on pace to rise more than 2% for the period.  An Atlanta Fed gauge estimates the gain at 2.3%, better than the 2.1% in the third quarter and enough to close out the year with [an] average quarterly gain of about 2.4%.

While that would mark a slowdown from the 2.9% increase in 2018, it would still be indicative that the decade-old expansion is alive and well and prepped to continue into 2020.

Just so. But we might remind the joymongers that recession is nearly always an invisible menace.

It often comes in on tiptoe… like a noiseless thief in the night.

The Shockingly Short Route From Expansion to Recession

As we have written before:

Periods of jogging, even galloping, growth may immediately precede recession.

We invite you again to consult the following dates. Each reveals the real economic expansion rate — the economic growth rate adjusted for inflation — immediately before recession’s onset:

  • September 1957:     3.07%
  • May 1960:                2.06%
  • January 1970:          0.32%
  • December 1973:      4.02%
  • January 1980:          1.42%
  • July 1981:                4.33%
  • July 1990:                1.73%
  • March 2001:             2.31%
  • December 2007:      1.97%.

(Again we acknowledge Lance Roberts of Real Invest‍ment Advice for the data).

No Indication of Recession “Anywhere in Sight”

Review the figures. You are immediately seized by this strange and remarkable fact:

Recession has followed hard upon jumping growth of 3.07%, 4.02%… and 4.33%.

“At those points in history,” Roberts reminds us, “there was NO indication of a recession ‘anywhere in sight.’”

Let the record further reflect:

Growth ran 2% or higher immediately prior to five of nine recessions listed.

Third-quarter 2019 GDP came ringing in at 2.1%. And the Federal Reserve projects Q4 2019 will turn in 2.3% growth when the tally comes in Jan. 30.

What was GDP before the last recession — the Great Recession?

It was 1.97% — a workable approximation of the rate presently obtaining.

“Very, very few recessions have been predicted nine months or a year in advance,” affirms economist Prakash Loungani.

Adds George Washington University economist Tara Sinclair:

“There’s no economic data or research or analysis that suggests we can look 12 months into the future and predict recessions with any confidence.”

The facts are with them…

A Failure Rate Second to Few

The world has endured 469 downturns since 1988. How many did the IMF see coming?

Four.

This we have on authority of one Andrew Brigden, chief economist at Fathom Consulting.

But perhaps IMF economists are uniquely blinded and botched. Their private-sector brethren may enjoy superior vision. Private-sector economists are, after all, closer to the field of action.

But the record indicates private-sector economists are equally sightless, equally unable to penetrate the fog of data that surrounds them.

Between 1992 and 2014… 153 combined recessions came to 63 countries the world over.

How many recessions did private-sector economists spot coming — as a whole?

Five.

What is more, these bunglers generally undershoot recession’s severity.

Do we condemn the erring and wayward vision of professional economists, their phantom vision?

No. We question their value, certainly. But we do not condemn them.

“A Bedlam of Unpredictability”

The economy is a bedlam of unpredictability, an infinitely complex Rube Goldberg contraption — a chaos of billiard balls in endless and delirious collision.

Try to keep track of it…

A cue ball goes careening into a rack. A six ball lights out in one direction. A nine ball strikes out in a second, a four ball in a third…

A three ball goes knocking into an 11 ball, a two ball into a seven ball, a one ball into a 14 ball, a five ball into a 12 ball, a 13 ball into an eight ball, a 10 ball into a 15 ball…

Each in turn shoots in a random direction. Each then runs into another previously sent on its own indeterminate course.

Another dizzying chain reaction begins… with its own set of imponderables.

Into which pocket will each ball drop ultimately?

The answer is not only difficult to determine at the outset. It is impossible to determine at the outset.

The number of variables is endlessly boggling.

And so the economic outcome is impossible to determine too far out. And for the same exact reason.

As well hazard the winner of the 2096 presidential election… the number of angels that can fit on a pinhead… or the precise number of rocks in a senator’s skull.

Besides, we are in no position to mock the faulty psychic eyesight of economists…

A Prediction, Horribly Failed

That is because our own crystal gazing gives a consistently false image. For instance:

Roll back the calendar — to last Jan. 3.

The stock market had just come within one whisker of correction, defined as a 20% stagger.

We believed the curtain was coming down at last. We divined the Dow Jones would close 2019 at roughly 18,000… and the S&P near 2,000.

But we underestimated the Federal Reserve’s ferocious response and the vast pull of its magnetism.

Jerome Powell went into his trick bag. And our apocalypse went into oblivion…

The Dow Jones concluded the year above 28,500; the S&P above 3,200.

This year we tempted fate further yet. That is, we came out flat-footed with a prediction of the future, 10 years out.

We claimed the S&P will end this newly hatched decade between 1,500 and 2,300.

Today it floats at 3,265.

We claimed additionally the Dow Jones will be similarly trounced percentage wise.

Bulls, take heart! You need only glance at our record if concerned.

But come back home…

Few respectable economists forecast recession this year — or a stock market calamity.

And look at their record…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Markets vs. Politics: Which Will It Be?

This post Markets vs. Politics: Which Will It Be? appeared first on Daily Reckoning.

No man can avoid politics. All are in siege.

No rival field of human enterprise can approach its ferocity. War is the extension of what by other means… in Mr. Carl von Clausewitz’s telling?

The answer is politics of course.

Today we file a scorching tort against politics.

Politics separates, divides, enrages, disrupts — as war itself.

Democratic politics offer no exception. Reduce electoral politics to its naked core…

The Essence of Electoral Politics

You have Candidate X and you have Candidate Y. Each is nothing more in this world than a liar, jackleg or rogue.

This human sculch appears before the voters, hopeful of election.

Both roar their flubdubberies before eager and attentive crowds. Both shout their propagandas.

Each denounces the other as an arm of Satan. Amazingly, both are correct.

Come the election…

50.1% of voters yank a lever for X. 49.9% pull one for Y.

X claims the laurel. He immediately proceeds against the wants, hopes and interests of the hapless 49.9%.

Each day they live they must wither, cringe and chafe beneath X’s atrocities… helpless as worms on fisherman’s hooks.

Only upon some distant November can they heave this jackal out. Assume they do…

Yor some other Y — comes in. X’s voters must then endure their own parallel hells.

The case of President Donald J. Trump is brilliantly in point…

In Politics, Smaller Is Better

One half of the nation is with him. The other half is against — many violently against.

Why should 50%-plus one of the population boss 50%-minus one of the population?

The same pitiful calculus apply to elections at any level of American government… down to canine-catcher.

But the greater the scale… the greater the menace.

The mayor of Why, Arizona, may impose his torments upon his encircled victims — as may the mayor of Whynot, North Carolina.

Yet their victims are free to jump the fence. The next hamlet might run to saner and more tolerable settings… and so they flee.

Has a California or an Illinois gone lunatic? For many they have. But a Texas or a Tennessee holds out asylum.

These local competitions form a severe brake on the natural rascalities of politics.

But to escape a president a fellow must quit the country altogether — or rot down four years until he takes another go at the vote booth.

And if the scalawag wins reelection?

Then this wretch must endure another four years under occupation — for a total of eight.

There is politics for you.

The business is so dismal… it can wear the soul out of the stoutest fellow.

Now contrast the political system with the market system…

Voting in the Marketplace Is Entirely Different

Free markets — authentically free markets — lack entirely the violent combats central to politics.

They are scenes of peace, tolerance… and justice.

Let us draw a parallel case to our previous example of candidates X and Y…

A Coca-Cola holds itself out before the American people.

This candidate claims to be the “real thing.” “Vote for me,” it says.

Behind another podium stands a Pepsi.

“No. Vote for me,” counters this fellow. Drink me “for the love of it.”

Each cries his case before the voter.

This fickle and capricious fellow proceeds to reach into his wallet… and vote.

He pulls the lever for Coke. Or he pulls the lever for Pepsi.

Does his vote injure, usurp or ruffle another voter? Does he club the other voter over the head… as he does in politics?

In no way, no shape, no form.

Satisfied Voters

Both are satisfied voters. Neither has any care to impose his preference upon the other… or deny him his soft drink of choice.

Multiply this one example countless times and in countless directions — and you have a picture of majestic electoral peace.

McDonald’s versus Burger King, Honda versus Ford, Nike versus Adidas, Walmart versus Target… it is all one.

A vote for any of them is peaceful as a dove. This voter for any holds no gun to the other voter’s ribs.

When he votes in politics — conversely — he does hold a gun to the other’s ribs.

To pull a lever is to pull a trigger.

Red State vs. Blue State

Chain a red-state American to a blue-state American. Force a vote between any product on the free and open market.

The blue-state voter may razz the red-stater’s ghastly and barbarian tastes. The red-state voter may in turn razz the blue-stater’s effete and supercilious tastes.

But neither attempts to dragoon or bayonet the other. Each is free to vote his own way, as he might.

And so peace prevails between them.

But give them the choice of Trump versus Hillary or Trump versus whomever…

They will fall into savage combat… as the Kilkenny cats fell into savage combat.

We must therefore conclude the free market’s voting system is vastly superior to political voting.

A vote in the marketplace is a “win, win” deal, as our co-founder Bill Bonner styles it.

What is politics then but a colossal “win, lose” deal?

And market voting improves the world in ways large and small…

Voting in the Free Market Improves the World

Each business must compete for the consumer’s vote. That vote harms no one, as we have established.

It also benefits many. It benefits many because a vote sends a signal.

It tells the outvoted to field an improved product — or take the consequences. And an improved product lifts this world that much higher.

If a business fails the market’s harsh and ruthless voting, it falls into bankruptcy… and goes away.

Yet here is perhaps politics’s greatest crime, its most scarlet of sins:

It has drained away “social power”… and channeled it off into state power.

That is, politics has stripped society’s power and liberty… and handed them to the state.

Social Power vs. State Power

Albert Jay Nock (1870–1945) was a gentleman and thinker of deep and penetrating insight.

Nock bemoaned the loss of social power during the New Deal:

If we look beneath the surface of our public affairs, we can discern one fundamental fact: namely, a great redistribution of power between society and the State…

It is unfortunately none too well understood that, just as the State has no money of its own, so it has no power of its own. All the power it has is what society gives it, plus what it confiscates from time to time on one pretext or another; there is no other source from which State power can be drawn. Therefore every assumption of State power, whether by gift or seizure, leaves society with so much less power. There is never, nor can there be, any strengthening of State power without a corresponding and roughly equivalent depletion of social power…

Heretofore in this country sudden crises of misfortune have been met by a mobilization of social power. In fact (except for certain institutional enterprises like the home for the aged, the lunatic asylum, city hospital and county poorhouse), destitution, unemployment, “depression” and similar ills have been no concern of the State but have been relieved by the application of social power.

And as the frog in its pot acquiesces to the gradually warming water… the citizen has acquiesced to his gradual loss of social power:

Thus the State “turns every contingency into a resource” for accumulating power in itself, always at the expense of social power; and with this it develops a habit of acquiescence in the people. New generations appear, each temperamentally adjusted — or as I believe our American glossary now has it, “conditioned” — to new increments of State power, and they tend to take the process of continuous accumulation as quite in order.

The lingering vestiges of social power are in the State’s sights.

And many voters are hot to sign them away.

Is There Any Alternative to Politics?

Do we propose an alternative to the political arrangement?

No — not earnestly. We diagnose a disorder… we do not prescribe a fix.

Besides, most would find a true alternative hard to worry down. It would be very rough stuff.

We have previously held out the relative virtues of monarchy to jab cherished democratic theories.

But we certainly do not expect — nor do we propose — a return to monarchy.

But you say we are a republic, not a democracy. It is the best we can do in this fallen world of sin and evil.

Just so. We will not argue. But as French historian François Guizot said of republics:

“I have no use for a republic that begins with Plato… and ends necessarily with a policeman.”

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Trade Wars Just Getting Started

This post Trade Wars Just Getting Started appeared first on Daily Reckoning.

Markets are eagerly awaiting the conclusion of the so-called “phase one” trade deal between the U.S. and China.

Both parties are trying to reach a mini-deal involving simple tariff reductions and a truce on new tariffs along with Chinese purchases of pork and soybeans from the U.S.

The likely success or failure of the mini-deal has been a main driver of stock market action for the past year. When the deal looks likely, markets rally. When the deal looks shaky, markets fall.

A deal is still possible. But investors should be prepared for a shocking fall in stock market valuations if it does not. Markets have fully discounted a successful phase one, so there’s not much upside if it happens.

On the other hand, if phase one falls apart stock markets will hit an air pocket and fall 5% or more in a matter of days.

But even if the phase one deal goes through, it does not end the trade wars. Unresolved issues include tariffs, subsidies, theft of intellectual property, forced transfer of technology, closed markets, unfair competition, cyber-espionage and more.

Most of the issues will not be resolved quickly, if ever.

Resolution involves intrusion into internal Chinese affairs both in the form of legal changes and enforcement mechanisms to ensure China lives up to its commitments.

These legal and enforcement mechanisms are needed because China has lied about and reneged on its trade commitments for the past 25 years. There’s no reason to believe China will be any more honest this time around without verification and enforcement. But China refuses to allow this kind of intrusion into their sovereignty.

For the Chinese, the U.S. approach recalls the Opium Wars (1839–1860) and the “Unequal Treaty” (1848–1950) whereby foreign powers (the U.K., the U.S., Japan, France, Germany and Russia) forced China into humiliating concessions of land, port access, tariffs and extraterritorial immunity.

China has now regained its lost economic and military strength and refuses to make similar concessions today.

In order to break the impasse between protections the U.S. insists on and concessions China refuses to give.

This points to the fact that the “trade war” is not just a trade war but really part of a much broader confrontation between the U.S. and China that more closely resembles a new Cold War.

This big-picture analysis has been outlined in a speech given by Vice President Mike Pence in October 2018 and a follow-up speech delivered on Oct. 24, 2019. Both speeches are available on the White House website.

Secretary of State Mike Pompeo has also added his voice to the hawks warning that China is a long-term threat to the U.S. and that business as usual will no longer protect U.S. national security.

IMG 1

Pictured above are Vice President Mike Pence (l.) and Secretary of State Mike Pompeo (r.). Pence and Pompeo have taken the lead in the public criticism of China by the Trump administration. In a series of speeches and interviews they have pointed out egregious human rights violations, blatant theft of intellectual property and threatening military advances that should cause the U.S. to treat China as more of a geopolitical adversary than a friendly trading partner.

The views of Pence and Pompeo, often captured under the heading of the Pence Doctrine, were neatly summarized by China expert Gordon G. Chang, author of The Coming Collapse of China, in a Wall Street Journal Op-Ed on Nov. 7, 2019, quoted below:

The Trump administration is heading for a fundamental break with the People’s Republic of China. The rupture, if it occurs, will upend almost a half century of Washington’s “engagement” policies. Twin speeches last month by Vice President Mike Pence and Secretary of State Mike Pompeo contained confrontational language rarely heard from senior American officials in public.

“America will continue to seek a fundamental restructuring of our relationship with China,” the vice president said at a Wilson Center event on Oct. 24 as he detailed Chinaʼs disturbing behavior during the past year.

Some argue the vice presidentʼs talk didnʼt differ substantively from his groundbreaking October 2018 speech, but these observers fail to see that in the face of Beijingʼs refusal to respond to American initiatives, Mr. Pence was patiently building the case for stern U.S. actions.

Moreover, the vice presidentʼs thematic repetition was itself important. It suggested that the administrationʼs approach, first broadly articulated in the December 2017 National Security Strategy, had hardened. That document ditched the long-used “friend” and “partner” labels.

Instead it called China — and its de facto ally Russia — “revisionist powers” and “rivals.”

At a Hudson Institute dinner last Wednesday, Mr. Pompeo spoke even more candidly: “It is no longer realistic to ignore the fundamental differences between our two systems and the impact… those systems have on American national security.” Chinaʼs ruling elite, he said, belong to “a Marxist-Leninist party focused on struggle and international domination.” We know of Chinese hostility to the U.S., Mr. Pompeo pointed out, by listening to “the words of their leaders.”

The U.S.-China trade war is not the anomaly globalists portray. It’s not even that unusual viewed from a historical perspective. Retaliation from trading partners is all in the game.

Free trade is a myth. It doesn’t exist outside classrooms. France subsidizes agriculture. The U.S. subsidizes electric vehicles. China subsidizes a long list of national champions with government contracts, cheap loans and currency manipulation. Every major economy subsidizes one or more sectors using fiscal and monetary tools and tariffs and nontariff barriers to trade.

Trump’s tariffs on China in January 2018 were reputedly the start of a trade war, but the war was actually begun by China 24 years earlier when China devalued its currency (1994) and continued when China joined the WTO (2001) and immediately started to break WTO rules.

The trade battle is now joined, but no critical issues have been resolved and none will be in the near future. The U.S. cannot accept Chinese assurances without verification that intrudes on Chinese sovereignty.

China cannot agree to U.S. demands without impeding its theft of U.S. intellectual property. This theft is essential to escape the middle income trap that afflicts developing economies.

The EU is caught in the crossfire. The U.S. is threatening to impose tariffs on German autos and French agricultural exports as part of an effort to force an end to German and French subsidies to favored interests.

The U.S. will win the trade wars despite costs. China will lose the trade wars while maintaining advantages in intellectual property theft. Trade wars will continue for years, even decades, until China abandons communism or the U.S. concedes the high ground in global hegemony.

Neither is likely soon.

Regards,

Jim Rickards
for The Daily Reckoning

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The Fed Is Toying With Fire

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Deutsche Bank maintains a strict dossier on all the world’s asset classes.

Stocks, bonds, real estate, commodities — 38 assets, A through Z — Deutsche Bank has them under ruthless and unshakable surveillance.

Last December’s spywork revealed this arresting conclusion:

93% of all the world’s assets traded negative in 2018.

Not even in the fathomless depths of the Great Depression did so many global assets wallow in red.

But last year is last year. Scroll the calendar one year forward… to today.

What do we find?

We find a full 180-degree turning around.

Each and every asset Deutsche Bank tracks — all 38 — trade positive this year.

Affirms Deutsche Bank’s Craig Nicol:

All 38 assets in its tracking universe have posted positive year-to-date (YTD) returns in both local currency and dollar terms.

To what earthly energy can we ascribe this complete and dramatic reversal?

The answer — the truly shocking answer — in one moment.

We first consider a more immediate reversal…

Trump Sends Stocks Reeling

The Dow Jones went badly backwards this morning, down 400 points. It came back a bit in the afternoon, losing only 280 points by closing whistle.

The S&P and Nasdaq followed parallel routes.

The S&P lost 20 points on the day. The Nasdaq lost 47.

The negative catalyst came issuing out of 1600 Pennsylvania Ave. this morning…

Mr. Trump announced that a trade accord can wait. Wait until when?

Until after the 2020 election is concluded:

In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right… I have no deadline… In some ways, I think it is better to wait until after the election if you want to know the truth.

Wall Street’s trading algorithms plucked the news off the wires… and began to sweat.

Trade-sensitive stocks such as Apple and Caterpillar endured the greatest trouncings today, unsurprisingly.

Equally unsurprisingly, safe haven gold jumped $14 on the day.

And so the merry-go-round takes another spin. Which direction tomorrow takes it… who can say?

But to return to our central question:

Why are all 38 assets Deutsche Bank tracks positive on the year — when 93% of these same assets were negative last year?

Too Obvious for Words

We claimed above that the answer was “truly shocking.” But we merely perpetrated a con to hold your attention.

The answer is obvious to anyone with eyes willing and able to see…

The Federal Reserve was increasing interest rates and trimming its balance sheet in 2018. Last December Jerome Powell announced the business would proceed uninterrupted.

That was when the stock market fell into open and general revolt.

By Christmas Eve… it was a whisker away from “correction.”

And so Jerome Powell dropped his weapons, hoisted his surrender flag… and came out hands in the air.

Wall Street had him.

Safely under lock, safely under key… Powell proceeded to lower rates three instances this year.

What is more, he called a premature halt to the quantitative tightening he had previously declared on “autopilot.”

Who can then be surprised that the Dow Jones industrial average has advanced 4,000 points this year?

Or that the other major indexes have marched with it?

But our tale does not conclude here. Instead, it takes a meandering twist down a side road…

A November to Remember

Rate cuts only partially explain this year’s asset extravaganza. The termination of quantitative tightening only partially explains this year’s asset extravaganza.

Can we credit a general optimism on trade (despite this morning’s blood and thunder)?

Perhaps partially — but only partially.

Whatever trade gives, trade takes back.

The promised trade deal has proved an endless frustration, a pretty plum dangled always beyond reach, a Christmas morning put off again, again and again.

For a full and complete explanation of the year in assets… we must peer deep within Deutsche Bank’s report.

There we will find this chestnut sandwiched within:

November posted some of the year’s loveliest asset gains. November, that is, hoisted all boats on its rising tide.

Why November?

For the answer we must first revisit September… and the “repo” market.

Just Don’t Call It QE4

Overnight lending rates leapt to 10% as liquidity ran dry — a high multiple of the federal funds rate then prevailing.

The Federal Reserve instantly hosed in emergency liquids to suppress the insurrection.

Mr. Powell declared the operation “temporary.” But on and on it went — into October, into November (and into December).

By November Mr. Powell and his minions at the New York Federal Reserve emptied in some $280 billion of liquidy credit.

They shrieked, howled and fumed that these “open market operations” were in no way quantitative easing.

Yet these activities inflated the Federal Reserve’s balance sheet… precisely as if they were quantitative easing itself.

From its maximum $4.5 trillion enormity, the quantitative tightening of 2018–19 siphoned down the balance sheet to $3.8 trillion.

But along came September… and its temporary open market operations.

By mid-November they reinflated the balance sheet to $4.04 trillion. Let us reintroduce the evidence we initially entered into record Nov. 15:

IMG 1

Smoking-gun Evidence

In all, the Federal Reserve has inflated the balance sheet $293 billion in under three months.

When was the last occasion the Federal Reserve carried on with such frantic fanaticism?

October 2008 — in the wildest psychosis of the financial crisis.

If you seek a thorough explanation for November’s asset surge, here you are.

But perhaps you demand further evidence. Then further evidence you shall have.

Here is the pistol, smoke oozing from its barrel…

The S&P turned in only one negative week these past two months. That was the same week — and the only week — that the balance sheet contracted.

Mainstream displays of lucidity and insight are rare and shocking. But here you have one, by way of CNBC’s Carl Quintanilla.

Dated Nov. 18:

Whether it should be considered QE4 or not, in the eyes of the market it’s just semantics. Markets view any increase in the size of the Fed’s balance sheet as QE and the $250 billion increase in just two months is no doubt helping to lift stock prices.

And the cup runneth over…

Hence November’s outsized influence on assets in general.

Hence we find all 38 asset classes Deutsche Bank tracks positive on the year.

But here is the danger:

The Federal Reserve’s liquidity may be kerosene that ultimately fans a conflagration…

A Potential Inferno

In Bank of America’s telling, Fed support of repo markets raises systemic financial risk.

That is because it allows excess leverage to pile up. If it comes tumbling down, if the system deleverages… it may strike the match on one royal blaze.

Bank of America’s Ralph Axel:

… there may be a situation in which banks want to deleverage quickly, for example during a money run or a liquidation in some market caused by a sudden reassessment of value as in 2008… the Fed’s abundant-reserve regime may carry a new set of risks by supporting… overly easy policy (expanding balance sheet during an economic expansion) to maintain funding conditions that may short-circuit the market’s ability to accurately price the supply and demand for leverage as asset prices rise.

Meantime, the Federal Reserve pours forth an average $5 billion of flammable liquid each day.

And someone, somewhere, is holding a match…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Time to Reduce Exposure to the Stock Market

This post Time to Reduce Exposure to the Stock Market appeared first on Daily Reckoning.

The major stock market indices will move sideways through the remainder of the month (and year) to end the year about where they are now. That said, if markets move outside a narrow range, there is more downside potential than upside.

This is a good time to lighten up on equity exposure and reallocate to bonds, cash and gold.

Stock markets haven’t gained much over the past two years. That may come as a shock to investors who feel like they’ve been on a roller coaster ride since early 2018. Yet, the fact is that the Dow Jones Industrial Index was 26,616 on January 26, 2018 and about 27,850 as of today.

That’s about a 1,200-point gain, or 600 points a year. 600 points is one good day for the market. Is that the best it can do over two years? Even adding an average 2% annual dividend yield, the annualized return is about 3%. That’s far less than an investor could have made in super-safe U.S. Treasury bonds.

If you’re a day trader, you might have made money buying dips and selling near the top in rallies. More likely, non-professional traders lost money chasing the rallies and bailing out during the drawdowns. If you’re the typical buy-and-hold investor watching your 401(k) statements, you’ve gone almost nowhere despite the fireworks. You’re right back where you started.

The question is, why?

The drivers of the sideways movement in stocks are slow economic growth and weak earnings growth in individual companies.The drivers of the short-term volatility along the way are good news/bad news on trade wars, and utter confusion at the Fed.

The bottom line is stocks are moving sideways on a sea of uncertainty. Let’s back up a minute to see how we got here…

After the Trump tax cuts passed in late 2017, the White House was predicting growth would return to the long-term trend (post-1980) of 3.2% or higher. That hasn’t happened.

The second quarter of 2018 did show annualized growth of 3.5%, but that was a one-time effect from employee bonuses and consumer confidence due to higher stock prices resulting from the Trump tax cuts.

That euphoria quickly faded.

Growth in the fourth quarter of 2018 was only 1.1%. For all of 2018, U.S. GDP grew by 2.9%, higher than the average growth since the end of the last recession in June 2009, but far less than the White House projected.

Since then growth has slowed even more as the effect of the 2017 tax cuts has faded. On an annualized based, the first quarter of 2019 showed 3.1% growth, the second quarter was 2.0% and original readings of third-quarter growth came in at 1.9%. It was upgraded to 2.1%, but that’s nothing to write home about.

This puts annualized growth year-to-date at 2.4%, almost exactly where it has been for the past ten years. In short, the Trump growth miracle is a mirage. We’re in the same 2.3% rut we’ve been in since 2009.

The cumulative impact of trade wars, currency wars and geopolitical tension is also reflected in a slowdown in global growth. The following summary comes from the IMF’s World Economic Outlook press conference on October 15, 2019 as presented by Gita Gopinath, Director of the IMF’s Research Department:

As for the global economy, the global economy is in a synchronized slowdown. And we are, once again, downgrading growth for 2019 to 3 percent, its slowest pace since the global financial crisis. Growth continues to be weakened by rising trade barriers and growing geopolitical tensions. We estimate that the U.S.‑China trade tensions will cumulatively reduce the level of global GDP by 0.8 percent by 2020. Growth is also being weighed down by country‑specific factors in several emerging market and developing economies and also by structural forces, such as low productivity growth and ageing demographics in advanced economies. … The weakness in growth is driven by a sharp deterioration in manufacturing and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods… Overall, trade volume growth in the first half of 2019 has fallen to 1 percent, the weakest level since 2012.

The good news/bad news volatility is also easy to explain. Stock markets are no longer traded by humans with different perspectives. Stocks are traded by robots, and robots are dumb.

Many investors still have the belief that their buy or sell stock orders are matched against other orders by humans with different views. The orders are matched by computers and the result is an orderly market with efficient price discovery. That scenario is not true.

Today, over 95% of New York Stock Exchange trades are generated by robots using algorithms to decide when to buy and sell. These are not matching systems (which have been around since the 1990s). These are trading robots that decide what to do without human intervention.

Trading is no longer man v. man or woman v. woman. It’s robot v. robot with a small number of trades in the form of man or woman v. robot. You’re not trying to outwit another human. You’re trying to outwit a robot.

The good news is that robots are easy to figure out. They act automatically based on source code and algorithms developed by coders and applied mathematicians who don’t necessarily know much about the psychology of markets. Robots buy or sell based on headlines or key words.

They also buy “high” (as defined) and sell “low” (also as defined) based on boundaries set by the developers.

This dynamic explains both the short-term volatility and the longer-term range bound trading. On the one hand, robots will scramble (in microseconds) to dump stocks if there’s a negative report in the trade wars.

They likewise buy stocks if there’s a positive report in the trade wars. At the same, robots will sell when stocks approach Dow 27,000 (or similar benchmarks on the S&P 500) and buy when stocks approach Dow 25,000.

Unfortunately, neither the robots nor their human developers were ready for the Age of Trump.

President Trump will call President Xi of China his “best friend” on Monday and denounce Chinese “theft” on a Wednesday. Robots are good at reading headlines, but they’re no good at understanding nuance, body language or Trump’s Art of the Deal style.

The same is true of the robots’ ability to understand the Fed.

Jay Powell was a hawk in December 2018 (when he raised rates), a dove in January 2019 (when he promised not to raise rates), a super-dove in the spring of 2019 when he decided to cut rates and end Fed balance sheet reductions, and utterly confused in September 2019 when he said he might not cut rates soon, but would expand the balance sheet. Then Powell cut rates again in October.

How is a robot supposed to understand a highly conflicted human? It can’t. But, it can issue automated buy and sell orders on every new headline.

The bottom line is that growth is weakening, the Fed is cutting rates, the trade wars are not over (despite happy talk) and political tensions are rising.

That’s a mix of support for stocks (Fed rate cuts and good trade war news) and headwinds for stocks (bad trade war news, weak growth and politics). These forces will tend to offset each other and leave stocks in early 2020 about where they are now.

That’s a reason to reduce equity exposure and consider some of the stronger plays in bonds and gold.

Regards,

Jim Rickards
for The Daily Reckoning

The post Time to Reduce Exposure to the Stock Market appeared first on Daily Reckoning.

Time to Reduce Exposure to the Stock Market

This post Time to Reduce Exposure to the Stock Market appeared first on Daily Reckoning.

Dear Reader,

The major stock market indices will move sideways through the remainder of the month (and year) to end the year about where they are now. That said, if markets move outside a narrow range, there is more downside potential than upside.

This is a good time to lighten up on equity exposure and reallocate to bonds, cash and gold.

Stock markets haven’t gained much over the past two years. That may come as a shock to investors who feel like they’ve been on a roller coaster ride since early 2018. Yet, the fact is that the Dow Jones Industrial Index was 26,616 on January 26, 2018 and about 27,850 as of today.

That’s about a 1,200-point gain, or 600 points a year. 600 points is one good day for the market. Is that the best it can do over two years? Even adding an average 2% annual dividend yield, the annualized return is about 3%. That’s far less than an investor could have made in super-safe U.S. Treasury bonds.

If you’re a day trader, you might have made money buying dips and selling near the top in rallies. More likely, non-professional traders lost money chasing the rallies and bailing out during the drawdowns. If you’re the typical buy-and-hold investor watching your 401(k) statements, you’ve gone almost nowhere despite the fireworks. You’re right back where you started.

The question is, why?

The drivers of the sideways movement in stocks are slow economic growth and weak earnings growth in individual companies.The drivers of the short-term volatility along the way are good news/bad news on trade wars, and utter confusion at the Fed.

The bottom line is stocks are moving sideways on a sea of uncertainty. Let’s back up a minute to see how we got here…

After the Trump tax cuts passed in late 2017, the White House was predicting growth would return to the long-term trend (post-1980) of 3.2% or higher. That hasn’t happened.

The second quarter of 2018 did show annualized growth of 3.5%, but that was a one-time effect from employee bonuses and consumer confidence due to higher stock prices resulting from the Trump tax cuts.

That euphoria quickly faded.

Growth in the fourth quarter of 2018 was only 1.1%. For all of 2018, U.S. GDP grew by 2.9%, higher than the average growth since the end of the last recession in June 2009, but far less than the White House projected.

Since then growth has slowed even more as the effect of the 2017 tax cuts has faded. On an annualized based, the first quarter of 2019 showed 3.1% growth, the second quarter was 2.0% and original readings of third-quarter growth came in at 1.9%. It was upgraded to 2.1%, but that’s nothing to write home about.

This puts annualized growth year-to-date at 2.4%, almost exactly where it has been for the past ten years. In short, the Trump growth miracle is a mirage. We’re in the same 2.3% rut we’ve been in since 2009.

The cumulative impact of trade wars, currency wars and geopolitical tension is also reflected in a slowdown in global growth. The following summary comes from the IMF’s World Economic Outlook press conference on October 15, 2019 as presented by Gita Gopinath, Director of the IMF’s Research Department:

As for the global economy, the global economy is in a synchronized slowdown. And we are, once again, downgrading growth for 2019 to 3 percent, its slowest pace since the global financial crisis. Growth continues to be weakened by rising trade barriers and growing geopolitical tensions. We estimate that the U.S.‑China trade tensions will cumulatively reduce the level of global GDP by 0.8 percent by 2020. Growth is also being weighed down by country‑specific factors in several emerging market and developing economies and also by structural forces, such as low productivity growth and ageing demographics in advanced economies. … The weakness in growth is driven by a sharp deterioration in manufacturing and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods… Overall, trade volume growth in the first half of 2019 has fallen to 1 percent, the weakest level since 2012.

The good news/bad news volatility is also easy to explain. Stock markets are no longer traded by humans with different perspectives. Stocks are traded by robots, and robots are dumb.

Many investors still have the belief that their buy or sell stock orders are matched against other orders by humans with different views. The orders are matched by computers and the result is an orderly market with efficient price discovery. That scenario is not true.

Today, over 95% of New York Stock Exchange trades are generated by robots using algorithms to decide when to buy and sell. These are not matching systems (which have been around since the 1990s). These are trading robots that decide what to do without human intervention.

Trading is no longer man v. man or woman v. woman. It’s robot v. robot with a small number of trades in the form of man or woman v. robot. You’re not trying to outwit another human. You’re trying to outwit a robot.

The good news is that robots are easy to figure out. They act automatically based on source code and algorithms developed by coders and applied mathematicians who don’t necessarily know much about the psychology of markets. Robots buy or sell based on headlines or key words.

They also buy “high” (as defined) and sell “low” (also as defined) based on boundaries set by the developers.

This dynamic explains both the short-term volatility and the longer-term range bound trading. On the one hand, robots will scramble (in microseconds) to dump stocks if there’s a negative report in the trade wars.

They likewise buy stocks if there’s a positive report in the trade wars. At the same, robots will sell when stocks approach Dow 27,000 (or similar benchmarks on the S&P 500) and buy when stocks approach Dow 25,000.

Unfortunately, neither the robots nor their human developers were ready for the Age of Trump.

President Trump will call President Xi of China his “best friend” on Monday and denounce Chinese “theft” on a Wednesday. Robots are good at reading headlines, but they’re no good at understanding nuance, body language or Trump’s Art of the Deal style.

The same is true of the robots’ ability to understand the Fed.

Jay Powell was a hawk in December 2018 (when he raised rates), a dove in January 2019 (when he promised not to raise rates), a super-dove in the spring of 2019 when he decided to cut rates and end Fed balance sheet reductions, and utterly confused in September 2019 when he said he might not cut rates soon, but would expand the balance sheet. Then Powell cut rates again in October.

How is a robot supposed to understand a highly conflicted human? It can’t. But, it can issue automated buy and sell orders on every new headline.

The bottom line is that growth is weakening, the Fed is cutting rates, the trade wars are not over (despite happy talk) and political tensions are rising.

That’s a mix of support for stocks (Fed rate cuts and good trade war news) and headwinds for stocks (bad trade war news, weak growth and politics). These forces will tend to offset each other and leave stocks in early 2020 about where they are now.

That’s a reason to reduce equity exposure and consider some of the stronger plays in bonds and gold.

Regards,

Jim Rickards
for The Daily Reckoning

The post Time to Reduce Exposure to the Stock Market appeared first on Daily Reckoning.

A Ferrari, Rolex, and The S&P 500 Walk Into a Bank…

This post A Ferrari, Rolex, and The S&P 500 Walk Into a Bank… appeared first on Daily Reckoning.

Dear Rich Lifer,

I have always been a collector of things.

When I was younger, I focused on coins … comic books … action figures … baseball cards … and all the other typical stuff 10-year-old boys like.

Since then, I’ve gotten into guitars, surfboards, vintage skateboards, wine, and even rare sneakers.

I’ve made money on just about every one of those things over the years while having fun along the way.

And while I continue to favor traditional financial assets for the lion’s share of an investment portfolio, I believe every investor should put at least some of their personal wealth into what professional investors commonly call “alternative assets” – whether you’re talking about precious metals or various collectibles.

Why?

Lots of reasons – privacy, safety, diversification, maybe even just sheer beauty or novelty!

Sound crazy or financially irresponsible?

Well, I’ve written about this before but consider the Rolex watch that I wear nearly every day.

The Rolex

It was about $2,500 new in 1999.

Today, after yet another recent surge in prices, it’s worth close to $10,000 … even with all the accumulated scratches, scrapes, and a faded bezel. (Actually, most watch collectors prefer examples that have been unpolished and show their natural patina.)

So I’ve enjoyed using and wearing this tool for 20 years and gotten a huge return along the way!

Meanwhile, if you were to pull up a chart of the S&P 500’s performance over that same two-decade period …

You would see, the S&P 500 has risen about 113% while my Rolex has quadrupled!

Okay, you’re probably thinking this is an isolated example.

Well, not really. If anything, most Rolex sports model watches have steadily risen in value over the last decade. Some of the most desirable models – like vintage Daytona and Submariner models are now fetching hundreds of thousands and continuing to appreciate sharply.

Imagine walking around with $200,000 on your wrist, and only the savviest observer having any clue!

That brings up something to consider about even ho-hum collectible watches like my own: I can hop on an airplane, fly to just about any major foreign city, and pretty quickly exchange my watch for cash in the local currency (or a precious metal).

Or what about that sports car you’ve always wanted? Surely you’d be better off putting the money into stocks or bonds, right?

When to Invest and When Not to

Well… Turns out maybe not.

Many collector-quality cars have been steadily rising in price, too.

Hagerty insurance keeps various indexes on the market – tracking prices for Ferraris, muscle cars, and other big categories.

A quick look shows big gains over the last decade in just about every instance.

For example, the company’s “blue chip” index measures the performance of 25 of the most sought-after collector cars. It’s gone from $500,000 in January of 2007 to roughly $2.5 million at the beginning of this year!

Heck, you know the old wisdom that cars depreciate the minute you drive them off the lot?

It’s not always true.

Many recent-model, gently-driven Porsche 911 GT3s are currently selling for more than their original MSRPs.

Or what about very high-end, low-production cars like the McLaren P1?

The lucky people who secured their cars for about $1 million new a couple years ago can now probably sell for double or triple that now.

Even I once bought a brand-new car and sold it for more money than I originally paid.

It was a 1997 Land Rover Defender 90, one of the last imported into the United States. I drove it for a few years and then sold it for about 10% more than it cost me.

Today that vehicle is worth even more still (yes, with tens of thousands of additional miles on it)!

The Value of Tangible Assets

Are situations like this common?

Hardly. But research and careful buying can pay off.

More recently, I owned a Lotus Elise sports car … drove it for a couple years … and didn’t lose a penny when I eventually sold it.

Cars and watches are only the beginning – guns, stamps, art, even those action figures from my childhood… there’s plenty of money to be made out there!

Of course, the real point is that many types of tangible assets appreciate in value… even as you enjoy looking at them… wearing them… or driving them.

Obviously, none of these assets produce income and that’s a MAJOR drawback. They are also less liquid than most financial assets. Heck, they could even be in the final stages of a massive price bubble.

But if history is any guide, tangible assets DO provide a solid combination of privacy, portability, wealth protection, and appreciation potential.

So I encourage you to learn more about some collectible category that suits your personal hobbies or interests.

You’ll not only get some extra diversification for your traditional portfolio, you’ll probably have a good time along the way!

To a richer life,

Nilus Mattive

Nilus Mattive

The post A Ferrari, Rolex, and The S&P 500 Walk Into a Bank… appeared first on Daily Reckoning.

A “License to Buy Everything”

This post A “License to Buy Everything” appeared first on Daily Reckoning.

Bloomberg captures the mood on Wall Street:

“Traders Take Fed Message as License to Buy Everything.”

Jerome Powell had his telegraph out yesterday… and wired a message of approaching rate cuts.

Federal funds futures give the odds of a July rate cut at 100%.

They further indicate three are likely by January.

And like sugar-mad 8-year olds amok in a candy store… traders are out for everything in sight.

Yesterday they drove the S&P past 3,000 for the first time. And today, freshly inspired, they sent the Dow Jones running to virgin heights.

The index crossed 27,000 this morning — timidly and briefly at first.

Comments by the president sent it temporarily slipping.

China is “letting us down,” Mr. Trump informed us.

Evidently China has not purchased satisfactory amounts of American agriculture — as it had agreed to at last month’s G20 summit.

And so the trade war menaces once again.

But the Dow Jones recalled Mr. Powell’s communique, rediscovered its gusto… and lit out for 27,000 once again.

It ended the day at 27,088.

Is Dow 30,000 Next?

We next await rabid and delirious shouts for Dow 28,000… 29,000… 30,000!

And who can say they will be wrong?

Dow 27,000 sounded plenty handsome not far back.

Yet here on July 11, Anno Domini 2019…  Dow 27,000 it is.

Don’t fight the Fed, runs an old market saw. It has proven capital advice…

The Fed does not box fairly.

It strikes beneath the belt. It bites in the clinches. It punches after the bell has rung.

Those unfortunates battling the Fed lo these many years have absorbed vast and hellful pummelings.

Justice may have been with them. But the judges were not.

“The Bears Have Been Damnably, Comedically, Infamously… Wrong”

With the displeasure of quoting ourself…

The frustrating thing about bears is that they make so much sense.

They heave forth every reason why stocks must collapse — all sound as a nut, all solid as oak.

Chapter, verse, letter, they’ll explain how the stock market is a classic bubble…

And how it has been inflated to preposterous dimensions by cheap credit.

P/E ratios haven’t been so high since the eve of the Crash of ’29, they’ll insist.

Market volatility has returned — and history shows trouble is ahead, they’ll warn.

Or that today’s sub-4% unemployment is a level historically attained only at peaks of business cycles.

And that recession invariably follows.

Et cetera, et cetera. Et cetera, et cetera.

But despite their watertight logic and all the angels and saints…

The bears have been damnably, comedically, infamously… wrong.

Since 2009, the Dow Jones has continually thumbed a mocking nose at them.

First at 10,000, then 15,000, at 20,000… then 25,000. 

Each point supposedly marked high tide — and each time the water rose.

It now rises to 27,000.

But is there some hidden pipe that could suddenly rupture, some unappreciated vulnerability that could send the Dow Jones careening?

Perhaps there is. But what?

The Dow’s Problem Child

Put aside the general hazards of trade war for now.

And turn your attention to Boeing…

Boeing has made the news in recent months — as you possibly have heard.

But its battering may continue yet. Explains famous money man Bill Blain:

Boeing has just announced its H1 [first half] deliveries in 2019 are down 54%. It has only delivered 90 new aircraft this year. Yet it is producing 42 new B-737 MAX’s each month and is having to store them on airport parking lots! It isn’t getting paid for these aircraft, but it still has supply chain commitments to meet. Boeing is hemorrhaging cash to build an aircraft no one can fly…

Boeing is trying to rush deliveries of other aircraft types to buyers to make up for the B-737 MAX cash slack. But there have been problems with B-787 Dreamliners built at its state-of-the-art Charleston factory “shoddy production and weak oversight” said The New York Times. At least one airline is said to be refusing to accept aircraft built outside Seattle. The U.S. Air Force stopped deliveries of new KC-46 tankers for a while when they found engineers had left hammers and other tools in wing and control spaces — a clear indication of “safety standards gotten too lax” said Defense News… This has massive implications for Boeing.

It may have massive implications for the stock market as well.

The Dow Jones is a price-weighted index.

Its components are weighted according to their stock price — not market capitalization or other factors.

And Boeing is the largest individual component on the Dow Jones. It presently enjoys an 11.6% weighting.

When Boeing goes up, the index often goes with it. When Boeing goes down, the index often goes with it also.

“The Likely Trigger for a Market Shock Will Be a ‘No-see-em’”

The bullet that fetches you is the bullet you don’t detect… as legend puts it.

And according to Blain,“The likely trigger for a market shock will be a ‘no-see-em.’”

He believes Boeing could be the “no-see-em” that knocks market flat:

I am concerned the market is underestimating just how bad things could go for Boeing, and when it does, the whole equity market will knee-jerk aggressively, triggering pain across all stocks… The crunch might be coming.

But perhaps Mr. Blain is chasing a phantom menace, a false bugaboo.

Scarcely a day passes that a fresh crisis-in-waiting does not invade our awareness.

Yet they all blow on by… “harmless as the murmur of brook and wind.”

We cannot argue Boeing will be different.

Hell to Pay

Perhaps we should raise a cheer today for Dow 27,000.

Yet the Lord above did not bless us with a believing or trusting nature.

Instead, we take our leaf from Mencken:

When we smell flowers… we look around for a coffin.

And as we have argued previously:

All things good must end, including bull markets — especially bull markets.

One day, however distant, there will be hell to pay.

And it won’t be the bears doing the paying…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post A “License to Buy Everything” appeared first on Daily Reckoning.

Can You Pass This Math Test?

This post Can You Pass This Math Test? appeared first on Daily Reckoning.

I love tests. Always have.

The way I see it, they’re a challenge — an opportunity to prove what you know — and also find out what you don’t know.

I recently told my 11-year-old daughter the same thing when she was complaining about school.

And then she turned around and did something really awesome – she made me a math test as a present for my recent birthday.

She searched the Internet and found some of the hardest SAT questions… put them into a little Google slideshow. And then gave me a set of rules for taking the thing (maximum 45 minutes, prizes depending on the number I got right, etc.).

Cool and creative, right?

And now I’m giving you the same type of gift today: a series of investment-related math questions.

It’s not as terrible as it sounds, I promise.

Question #1:

At one point in my career, I was running a real-money $100,000 portfolio for my dad and sharing the results with readers.

We made more than $54,000 over the course of several years of the publication and then decided to call it a wrap. But at one point, a reader wrote in and asked how to mirror the portfolio – which consisted of a bunch of different stock positions – with just $32,000 in starting capital.

Do you know how to do it?

Well, here’s the answer:

If you divide $32,000 by $100,000, you’ll get 32%.

That means you should then multiply every single position in the portfolio by .32 to arrive at the correct allocation for any given position.

And you’re so close to 33%, or 1/3, that you could also use that friendlier divisor and come close enough, too.

Okay, here’s another one for you…

Question #2:

You’re at a cocktail party and someone tells you they just made $10,000 on a single trade.

Are you impressed or not?

The answer, at least to me, is that you can’t answer.

See, one of my biggest pet peeves is hearing investors talk about gains and losses in dollar terms rather than percentages.

We don’t know how much the person initially invested to get that $10,000 profit!

If it was $1,000 you should be darn impressed. But if it took a million, then it’s probably time to go refill your drink.

Or what about someone who says such-and-such stock was “up ten points” yesterday?

Giving you this information isn’t helpful at all unless you know the starting point.

This is why I always prefer percentages. Percentages don’t lie.

If someone says they got a return of 45%, the only other thing we need to know is the timeframe; the amount of money originally invested is largely irrelevant.

It’s the same thing if someone tells you the Dow rose 2% — you don’t even have to know where it opened that morning to immediately grasp what happened.

Of course, a lot of people misunderstand the difference between percentages and percentage points…

Question #3:

Consider the following two sentences:

Sentence A: “Stock XYZ beat the S&P 500 by 10 percent last year.”

Sentence B: “Stock XYZ beat the S&P 500 by 10 percentage points last year.”

Are they expressing the same idea?

Well, let’s assume the market was up 10% last year.

That means in Sentence A, stock XYZ was up 11% for the year.

Here’s the math behind the answer: 11 minus 10 equals 1, and 1 divided by 10 equals .10, or 10%.

Sentence B, however, says stock XYZ rose 10 percentage points.

In other words, it rose 10% above and beyond the market’s 10% gain.

So in Sentence B, stock XYZ was up 20% for the year… which is quite a difference in meaning from Sentence A!

Okay, final question for today…

Question #4:

Does a $1 stock carry more profit potential than a $1,000 stock?

Plenty of people think so. They tell me they like “cheap” stocks because they get more bang for their buck.

There’s no doubt on a day-to-day basis, you will likely see much sharper moves from the typical smaller stock.

It’s also true that some tiny companies go on to become huge success stories creating huge windfalls for their early investors.

But how many small firms go belly up for every one that skyrockets?

Or how many small shares crash just as quickly as they soared?

Meanwhile, larger stocks – whether you’re talking about the size of the company or the share price – can also double, triple or quadruple in value.

Just look at Apple Computer. It’s up about 780% over the last decade and it was hardly a small, unknown, low-priced stock in 2009!

To me, it’s far better to fixate on a stock’s value rather than its price. A truly “cheap” stock is one where the underlying business is worth more than what share price suggests.

After all, it doesn’t matter if you buy 1000 shares of a $1 stock or one share of a $1,000 stock.

You’re making the same overall investment in dollar terms… and a 10% rise in either gives your portfolio the exact same result.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Can You Pass This Math Test? appeared first on Daily Reckoning.

Ferrari, Rolex, or the S&P 500?

This post Ferrari, Rolex, or the S&P 500? appeared first on Daily Reckoning.

I have always been a collector of things.

When I was younger, I focused on coins … comic books … action figures … baseball cards … and all the other typical stuff 10-year-old boys like.

Since then, I’ve gotten into guitars, surfboards, vintage skateboards, wine, and even rare sneakers.

I’ve made money on just about every one of those things over the years while having fun along the way.

And while I continue to favor traditional financial assets for the lion’s share of an investment portfolio, I believe every investor should put at least some of their personal wealth into what professional investors commonly call “alternative assets” – whether you’re talking about precious metals or various collectibles.

Why?

Lots of reasons – privacy, safety, diversification, maybe even just sheer beauty or novelty!

Sound crazy or financially irresponsible?

Well, I’ve written about this before but consider the Rolex watch that I wear nearly every day.

The Rolex

It was about $2,500 new in 1999.

Today, after yet another recent surge in prices, it’s worth close to $10,000 … even with all the accumulated scratches, scrapes, and a faded bezel. (Actually, most watch collectors prefer examples that have been unpolished and show their natural patina.)

So I’ve enjoyed using and wearing this tool for 20 years and gotten a huge return along the way!

Meanwhile, this chart shows the stock market’s performance over that same two-decade period …

As you can see, the S&P 500 has risen about 113% while my Rolex has quadrupled!

Okay, you’re probably thinking this is an isolated example.

Well, not really. If anything, most Rolex sports model watches have steadily risen in value over the last decade. Some of the most desirable models – like vintage Daytona and Submariner models are now fetching hundreds of thousands and continuing to appreciate sharply.

Imagine walking around with $200,000 on your wrist, and only the savviest observer having any clue!

That brings up something to consider about even ho-hum collectible watches like my own: I can hop on an airplane, fly to just about any major foreign city, and pretty quickly exchange my watch for cash in the local currency (or a precious metal).

Or what about that sports car you’ve always wanted? Surely you’d be better off putting the money into stocks or bonds, right?

When to Invest and When Not to

Maybe not.

Many collector-quality cars have been steadily rising in price, too.

Hagerty insurance keeps various indexes on the market – tracking prices for Ferraris, muscle cars, and other big categories.

A quick look shows big gains over the last decade in just about every instance.

For example, the company’s “blue chip” index measures the performance of 25 of the most sought-after collector cars. It’s gone from $500,000 in January of 2007 to roughly $2.5 million at the beginning of this year!

Heck, you know the old wisdom that cars depreciate the minute you drive them off the lot?

It’s not always true.

Many recent-model, gently-driven Porsche 911 GT3s are currently selling for more than their original MSRPs.

Or what about very high-end, low-production cars like the McLaren P1?

The lucky people who secured their cars for about $1 million new a couple years ago can now probably sell for double or triple that now.

Even I once bought a brand-new car and sold it for more money than I originally paid.

It was a 1997 Land Rover Defender 90, one of the last imported into the United States. I drove it for a few years and then sold it for about 10% more than it cost me.

Today that vehicle is worth even more still (yes, with tens of thousands of additional miles on it)! 

The Value of Tangible Assets

Are situations like this common?

Hardly. But research and careful buying can pay off.

More recently, I owned a Lotus Elise sports car … drove it for a couple years … and didn’t lose a penny when I eventually sold it.

Cars and watches are only the beginning – guns, stamps, art, even those action figures from my childhood … there’s plenty of money to be made out there!

Of course, the real point is that many types of tangible assets appreciate in value … even as you enjoy looking at them … wearing them … or driving them.

Obviously, none of these assets produce income and that’s a MAJOR drawback. They are also less liquid than most financial assets. Heck, they could even be in the final stages of a massive price bubble.

But if history is any guide, tangible assets DO provide a solid combination of privacy, portability, wealth protection, and appreciation potential.

So I encourage you to learn more about some collectible category that suits your personal hobbies or interests.

You’ll not only get some extra diversification for your traditional portfolio, you’ll probably have a good time along the way!

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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