A “License to Buy Everything”

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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…


Brian Maher
Managing editor, The Daily Reckoning

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Can You Pass This Math Test?

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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

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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.


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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Why You Should Trade Like You’re on a Diet

This post Why You Should Trade Like You’re on a Diet appeared first on Daily Reckoning.

My Dad had to put himself through college.

To pay his own way, he worked a number of jobs while taking classes and studying. And to save money and time, he ate the vast majority of his meals at “greasy spoon” diners.

So by the time I was born he had gained a college diploma… a solid job… and also more than a hundred pounds of extra weight.

One day, when I was in elementary school, Dad decided it was time to do something about his health.

He wanted to be around as I grew up so he designed a simple weight loss system that relied on the same discipline he used during his school years.

The first step was watching what he ate a bit more carefully. For example, I remember him removing half of the bun whenever he had a hamburger.

But the keystone of the whole plan was that, instead of eating lunch, he started taking a brisk two-mile walk every day during his break.

Sounds almost too simple, right? And yes, it flies in the convention of “smaller meals throughout the day” and all the other current thinking on weight loss.

Still, it worked! And Dad went from more than 280 pounds to back under 180.

More importantly, he has kept the majority of that weight off all the way through today – 35 years later!

Weight Loss and Wealth Building

As a lot of people like to point, weight loss simply boils down to fewer calories coming in than you’re burning off.

That’s exactly what Dad accomplished by cutting out lunch and replacing it with exercise. 

Really, all he had to do was stick with the system and some degree of success was practically inevitable!

It’s the same basic thing with wealth building.

If you spend less than you earn, you gain money over time. The longer you do it, the more you gain. The bigger the difference, the more you save. If there are investment earnings in there, things compound even faster.

Again, it’s pretty simple.

Want to take it a step further and become a trader?

Then you want to increase your number of winning trades to pack on the wealth by compounding the gains on top of each other.

And you want to cut your losers before they do much damage to your overall results.

That way your portfolio grows fatter, faster!

But how do you do this in a systematic way?

Just like dad’s diet, there are two basic steps to take:

Step 1: Institute Stop Losses on Every Trade You Make

These orders tell your brokerage to automatically sell a given investment if it drops to a predetermined level.

That way, you are out before the investment has a chance to drop any further.

You can also continually raising these stop losses along with any success you begin seeing – so that your overall downside keeps getting reduced in the process.

Please note: I am not talking about so-called “mental stop losses,” which so many people love to use.

Having predetermined prices at which you MIGHT cut losses is far different from actually entering those orders with your brokerage the minute you institute any particular position.

In fact, I would say this crucial difference is what separates successful traders from the legions of wannabes.   

It’s too easy to change your mind once a trade goes against you!

Of course, you also need…

Step 2: Determine Your Price Targets and Enter Them as Additional Sell Orders

In a more active approach, having predetermined profit targets is just as important as having defined stop losses.

Because the whole point is moving from one winner to the next as quickly as possible… unemotionally… and without looking back or second-guessing your decisions.

No matter how good of an investor you are, you’ll never get your timing right all of the time.

Nor do you need to. You simply need to have the profits from your good trades total more than the losses from your bad trades.

This is precisely what a combination of stop losses and profit targets can help you accomplish.

That way the overall results get better and better, just as my Dad’s weight dropped consistently over time.

To be clear, I don’t believe you need such a system with long-term approaches like buying and holding quality income stocks.

However, I think this type of discipline is absolutely necessary if you’re looking for bigger, faster returns in a shorter period of time by actively trading your portfolio.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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What Happened to the Bear Market

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From valley to peak in the space of one month…

The bears were poised to claim final victory in late December… and black crepe was unfurling over Wall Street.

The major averages lost nearly 20% from their early October highs. The Nasdaq in fact tumbled into an official bear market.

Who could say where it would stop?

All things good must end — unlike some things bad — and 10 years is a plenty handsome run.

But a hero stepped forth at the fatal hour…

“Not on my watch!” thundered Jerome Powell.

Through the canyons of Lower Manhattan he rode, atop his barreling white steed… down Broadway, left on Wall… and through the doors of the New York Stock Exchange.

Mr. Powell announced he was “prepared to adjust policy quickly and flexibly”… and that he was “listening carefully” to markets.

He further pledged to announce a halt to quantitative tightening “if needed.”

“We wouldn’t hesitate to change it,” he reassured the assembled.

Powell was huzzahed and hoorayed through all of Wall Street… and tall glasses were hoisted in his honor.

Thus the “Powell Put” was christened.

Markets now know Powell is behind them if the bears draw too close…

As they knew Yellen was behind them… and Bernanke before her… and Greenspan before him.

The Dow Jones has recaptured some 3,000 points since its Dec. 24 bottom.

The S&P has put on a similar show, and the Nasdaq has nearly clawed out of its bear market.

Have underlying economic conditions brightened vastly to justify the upswing?

Not by our liver and lights…

Does not a Federal Reserve about-face mean it spots trouble ahead? Why else would it back off?

Growth is trending in the improper direction.

Q4 GDP 2018 numbers have yet to be released, yet they will likely slip beneath Q3’s.

Meantime, the New York garrison of the Federal Reserve published its U.S. household debt and credit report yesterday.

It revealed a record 7 million Americans are at least 90 days behind on their auto loans.

If further revealed that private debt scaled a record $13.5 trillion in last year’s final quarter.

That same Federal Reserve Bank of New York gives a 21% chance of recession within the next year — its highest reading since 2008.

A Bloomberg survey of economists has it at 25%… the highest in six years.

Finally, JPMorgan estimates a 35% chance of recession this year — up from 16% last March.

Do we place our stock in the speculations of Ph.D.-ed economists?

We certainly do not.

But why else has the stock market had its run… if not for the heroics of the Hon. Jerome H. Powell?

It’s the splendid unemployment numbers, you say.

Unemployment struck a 49-year, 3.7% low in September. It rose to 3.9% in December… and 4% in January.

Fine numbers all, a swell show by any account.

But the trend is higher…

And according to data from the National Bureau of Economic Research, unemployment often bottoms nine months before recession.

If unemployment scraped bottom in September… you may wish to keep a weather eye on June.

We, of course, hazard no formal prediction.

Perhaps the global economy justifies Wall Street’s renewed rambunctiousness?

It is unlikely.

China wallows, Japan dozes, Germany verges on recession, Brexit overhangs Great Britain as a sword overhung Damocles of old.

Further examples abound.

Meantime, the United States-China trade deadline is two weeks out.

One day a deal seems likely. The next it does not.

“Uncertain” is the word that leaps to mind.

Yet Wall Street is presently having itself a moment.

When that moment fades… we cannot say.

There is even renewed talk of a “melt-up.”

One source is Dario Perkins, managing director of global macro at TS Lombard.

This fellow likens today’s market to 1998 — the years preceding the dot-com mania — and its subsequent collapse.

Analyst Mark Kolakowski, summarizing Perkins’ stance:

“Like today, many parts of the world were in distress.” In response, “the FOMC shifted from a tightening bias to an emergency rate cut in a manner of weeks.” The principal effect, he says, was a two-year melt-up, or sudden surge, in stock prices that eventually led to the so-called dot-com crash, in which the S&P 500 dropped by 45% and the Nasdaq Composite plummeted by 78%…

Perkins predicts that the Fed may cut rates in the second half of 2019 as U.S. exports weaken and delayed effects of previous rate hikes take full effect. 

Again, we offer no specific prediction. But melt-ups are followed by meltdowns.

Regardless, the market gods will not be forever duped and put off.

As we have claimed before:

One day, however distant, there will likely be hell to pay…

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


Brian Maher
Managing editor, The Daily Reckoning

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A Trained Monkey Could Do Better

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The first time I appeared on live financial television was August 15, 2007. It was a guest appearance on CNBC’s Squawk Box program at the early stages of the 2007-2008 financial crisis.

Of course, none of us knew at that time exactly how and when things would play out, but it was clear to me that a meltdown was coming; the same meltdown I had been warning the government and academics about since 2003.

I’ve done 1,000 live TV interviews since then, but that first one remains memorable. Carl Quintanilla conducted the interview with some participation from Becky Quick, both of whom could not have been more welcoming.

They and the studio crew made me feel right at home even though it was my first time in studio and my first time meeting them. Joe Kernan remained off-camera during my interview with his back turned reading the New York Post sports page, but that’s Joe. We had plenty of interaction in my many interviews over the years that followed.

When I was done, I was curious about how many guests CNBC interviewed over the course of a day. Being on live TV made me feel a bit special, but I wanted to know how special it was to be a guest. The answer was deflating and brought me right down to earth.

CNBC has about 120 guests on in a single day, day after day, year after year. Many of those guests are repeat performers, just as I became a repeat guest on CNBC during the course of the crisis. But, I was just one face in the midst of a thundering herd.

What were all of those guests doing with all of that airtime? Well, for the most part they were forecasting. They predicted stock prices, interest rates, economic growth, unemployment, commodity prices, exchange rates, you name it.

Financial TV is one big prediction engine and the audience seems to have an insatiable appetite for it. That’s natural. Humans and markets dislike uncertainty, and anyone who can shed some light on the future is bound to find an audience.

Which begs a question: How accurate are those predictions?

No one expects perfection or anything close to it. A forecaster who turns out to be accurate 70% of the time is way ahead of the crowd. In fact, if you can be accurate just 55% of the time, you’re in a position to make money since you’ll be right more than you’re wrong. If you size your bets properly and cut losses, a 55% batting average will produce above average returns.

Even monkeys can join in the game. If you’re forecasting random binary outcomes (stocks up or down, rates high or low, etc.), a trained monkey will have a 50% batting average. The reason is that the monkey knows nothing and just points to a random result.

Random pointing with random outcomes over a sustained period will be “right” half the time and “wrong” half the time, for a 50% forecasting record. You won’t make any money with that, but you won’t lose any either. It’s a push.

So, if 70% accuracy is uncanny, 55% accuracy is OK, and 50% accuracy is achieved by trained monkeys, how do actual professional forecasters do? The answer is less than 50%.

In short, professional forecasters are worse than trained monkeys at predicting markets.

Need proof? Every year, the Federal Reserve forecasts economic growth on a one-year forward basis. And it’s been wrong every year for the better part of a decade. When I say “wrong” I mean by orders of magnitude.

If the Fed forecast 3.5% growth and actual growth was 3.3%, I would consider that to be awesome.

But, the Fed would forecast 3.5% growth and it would come in at 2.2%. That’s not even close considering that growth is confined to plus or minus 4% in the vast majority of years.

If you have defective and obsolete models, you will produce incorrect analysis and bad policy every time. There’s no better example of this than the Federal Reserve.

The Fed uses equilibrium models to understand an economy that is not an equilibrium system; it’s a complex dynamic system. The Fed uses the Phillips curve to understand the relationship between unemployment and inflation when 50 years of data say there is no fixed relationship.

The Fed uses what’s called value-at-risk modeling based on normally distributed events when the evidence is clear that the degree distribution of risk events is a power curve, not a normal or bell curve.

As a result of these defective models, the Fed printed $3.5 trillion of new money beginning in 2008 to “stimulate” the economy only to produce the weakest recovery in history. Now, the cycle of monetary tightening has been ongoing in various forms for nearly six years.

Let’s not be too hard on the Fed. The IMF forecasts were just as bad. And the “the wisdom of crowds” can also be dramatically wrong.

It does not have very high predictive value. It’s just as faulty as the professional forecasts from the Fed and IMF.

There are reasons for this. The wisdom of crowds is a highly misunderstood concept. It works well when the problem is simple and the answer is static, but unknown.

The classic case is guessing how many jellybeans are in a large jar. In that situation, the average of 1,000 guesses actually will be better than a single “expert” opinion. That works because the number of jellybeans never changes. There’s nothing dynamic about the problem.

But, when the answer is truly unknown and the problem is complex and dynamic such as capital markets forecasting, then the wisdom of crowds is subject to all of the same biases, herding, risk aversion, and other human quirks known through behavioral psychology.

This is important because when academics say “you can’t beat the market,” my answer is the market indicators are usually wrong. When talking heads say, “you can’t beat the wisdom of crowds,” I just smile and explain what the wisdom of crowds actually does and does not mean.

By the way, this is one reason why markets missed Brexit and Trump. The professional forecasters simply misinterpreted what polls and betting odds were actually saying.

None of this means that polls, betting odds, and futures contracts have no value. They do. But, the value lies in understanding what they’re actually indicating and not resting on a naive and superficial understanding of the wisdom of crowds.

Does this mean that forecasting is impossible or that the experts are uninformed? Not at all. Highly accurate forecasting is possible.

The problem with the “experts” is not that they’re dopes (they’re not), or they’re not trying hard (they are). The problem is that they use the wrong models. The smartest person in the world working as hard as possible will always be wrong if you use the wrong model.

That why the IMF, Fed, and the wisdom of crowds bat below .500. They’re using the wrong models.

But here at Project Prophesy, I can confidently say I’ve got the right models, which I developed for the CIA working in collaboration with top applied mathematicians and physicists at places like the Los Alamos National Laboratory and the Applied Physics Laboratory.

It’s these models that let me accurately forecast events like Brexit and the election of Donald Trump, while all the mainstream analysts laughed in my face. It’s not that I’m any smarter than many of these people. It’s just that I use superior models that work in the real world, not in never-never land..

These models do not assume equilibrium systems and normally distributed risk like mainstream models. My models are based on complexity theory, Bayesian statistics, behavioral psychology and history. They produce much more accurate results than all of the alternatives.

This is the methodology behind my forecasts, which allows my readers access to actionable market recommendations they won’t find elsewhere.


Jim Rickards

for The Daily Reckoning

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The Date Stocks Will Reach New Highs

This post The Date Stocks Will Reach New Highs appeared first on Daily Reckoning.

The S&P recently tumbled 19.8% before finding its legs — coming within an ace of the official 20% defining a bear market.

Bet let us declare it a bear market and have done.

Based on history’s telling, when can you expect stocks to recapture their early October 2018 highs?

A) 11.4 months

B) 1.6 years

C) 3.2 years

D) 5.7 years

The answer shortly.

But first a progress report…

The Dow Jones marched 164 points forward today.

The S&P added 20; the Nasdaq, 49.

Meantime, we see today that Daily Reckoning associate John Mauldin is lacing into the Federal Reserve.

For what reason?

Scientific incompetence — conducting a “two-variable” experiment.

That is, for raising interest rates while simultaneously trimming its balance sheet.

Do one. Or do the other.

But not both at once, he laments:

No serious scientist would run a two-variable experiment. By that I mean, you run an experiment with one variable to see what happens.

If you have two variables and something happens — either good or bad — you don’t know which variable caused it.

You first run the experiment with one variable, then do it again with the second one. After that, you have the knowledge to run an experiment with both.

So disturbed is Mr. Mauldin that he labels it “decidedly the stupidest monetary policy mistake in a long line of Fed mistakes.”

A remarkable achievement, if true. It is a line already stretching horizon to horizon.

But we suspect Mauldin has hooked onto something here.

The fed funds rate — whose range the Federal Reserve’s “Open Market” Committee establishes — stands presently between 2.25% and 2.50%.

But when combined with quantitative tightening, the “true” federal funds rate may approach 5%… or double the official rate.

Explains analyst Michael Howell of the CrossBorder Capital blog:

In other words,[it is] equivalent to the Fed undertaking around 20 rate hikes rather than the nine it has so far implemented this cycle.

Twenty rate hikes since December ’15!

How can it fail to leave its impact?

We have further suggested that the fed funds rate may now have crossed the “neutral rate” of interest.

Above the neutral line rates no longer offer economic support. Nor do they merely hold the scales even.

They instead form an active drag.

Meantime, global liquidity is evaporating before our eyes… like a puddle in the searing equatorial sun.

Global central banks heaved forth some $2.7 trillion of credit growth in 2017.

And in 2018?

Global credit contracted $410 billion.

Never before in history, Atlas Research reminds us, has the world witnessed a $3.1 trillion reversal in central bank liquidity.

Do you require further explanation for the market’s negative returns last year?

Or for the bear market October–December?

It is said one picture is worth a thousand words. Here is an example brilliantly in point:


No one should therefore be surprised to find the global economy going backward.

Chinese exports have plunged to two-year lows. Imports are also reversing.

Export powerhouse Germany is now reporting its steepest industrial decline in a decade.

As we reported this week:

The world has almost certainly sunk into recession if we take industrial growth as a thermometer of global economic health.

The so-called Organisation for Economic Cooperation and Development (OECD) runs its own economic health diagnostic.

Its composite leading indicator ran to 99.3 in November (the most recent available data).

The December number will likely dip beneath 99.3.

For 50 years running, we learn from Reuters, the United States has entered recession whenever the index slips below 99.3.

The roster includes 1970, 1974, 1980, 1981, 1990, 2001 — and 2008.

1998 supplied the lone exception.

But to return to our original question — how long must you wait before the stock market makes good its 20% losses?

The answer assumes added significance the nearer you come to retirement.

Assume the recent bear market knocked you back 20%.

Must you wait up to six years to merely catch up?

Or perhaps you are already retired and things are tight.

Must you now confront the nightmare reality of running out of money?

An Allianz Life survey reveals retirees fear going broke more than death itself.

61% to 39% they preferred the grave to the gutter.

And so… can you expect the stock market to recover its bear market losses in:

A) 11.4 months

B) 1.6 years

C) 3.2 years

D) 5.7 years

Stretching back to 1900, financial journalist Mark Hulbert ran the numbers through his mill… in search of light.

He took account for dividends and inflation to give the truest reading.

What was the final answer?

C — 3.2 years.

Not 11.4 months, that is — but not 5.7 years either.

If the historical average holds, the stock market will attain new heights in December 2021.

But examine the median recovery, says Hulbert — “such that half of the bear market recoveries were shorter and half longer” — and a brighter image emerges.

The median recovery period is 1.9 years… putting the market at new heights next September.

But statistics are lovely liars.

The market may recover quicker yet… or slower yet.

We suspect slower as we gaze out upon the gathering gloom.

Recall, the Federal Reserve is executing “decidedly the stupidest monetary policy mistake” in its history.

Recall further that global liquidity is in deep contraction.

Recall further still that leading economic data suggest the world is sinking into recession.

But we concede… we have no answer.

Veritatem dies aperit, said the Roman Seneca — time reveals truth.

Time — only time — will tell.


Brian Maher
Managing editor, The Daily Reckoning

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Markets Hang “Between Order and Chaos”

This post Markets Hang “Between Order and Chaos” appeared first on Daily Reckoning.

Today we bear dramatic news:

Markets have entered a “phase transition zone”… the “magic space between order and chaos.”

This we have on the authority of the brains at Fasanara Capital.

But what will emerge on the other side — order or chaos?

Today our mood is heavy, our brow creased with thought… as we hunt the answer.

We begin with a hypothesis:

Since the financial crisis, central banks have acted as an overprotective parent… or an overzealous referee of a prize fight.

They have kept the bears separated from the bulls, chained in a neutral corner where they could do no harm.

That is, they have throttled off the violent combats, the savage brawls of the market.

“This stock is worth x,” shout the bulls in a normal market. “No — it is only worth y,” roar the protesting bears.

They are soon upon each other’s throats.

Into a cloud of dust they vanish, arms, legs, elbows, flying — and may the better man win.

Ultimately a winner emerges with the proper price.

The professional men call it price discovery. 

Price discovery represents, to mix the figure a bit, the democracy of the marketplace.

Each investor has a vote. His vote may contrast bitterly with the other fellow’s.

But the better ideas will generally win the election… and the worse will lose.

The world is left with better mousetraps, superior companies, happier customers.

An Amazon cleans out a Sears. An Apple pummels a Compaq into nonexistence. A Google shows an AOL its dust.

And so on. And so on.

But after the financial crisis, the central banks rolled in with their tanks… and declared martial law.

The democracy of the marketplace went under the treads.

Is this company superior to that one? Does it deserve its stock price?

No one could say.

QE and zero interest rates put blindfolds over everyone’s eyes… and tape over their mouths.

“Passive” investing waged additional war on price discovery.

“Passively” managed funds make no effort to pinpoint winners. They track an overall index or asset category — not the individual components.

Passive investing has rendered actively picking stocks a fool’s errand.

Some 86% of all actively managed stock funds have underperformed their index during the last 10 years.

Explains Larry Swedroe, director of research at Buckingham Strategic Wealth:

“While it is possible to win that game, the odds of doing so are so poor that it’s simply not a prudent choice to play.”

Despite the gaudy averages, only a handful of stocks accounted for most of the market’s gains these past few years.

Through last August, for example, the FAANG stocks  — Facebook, Amazon, Apple, Netflix, Alphabet (Google’s parent company) —  accounted for half of the S&P’s gains.

But it was the false stability of Saddam Hussein’s Iraq. Hang the leader and the place goes to pieces.

In October the FAANGs began going to pieces. A period of vast instability resulted.

And the stock market came within an inch of a bear market by year’s end.

Since investors were all going blind, who could take up the load?

Markets began approaching Fasanara’s “phase transition zone.”

In a word… central banks have destroyed the market’s “resilience.”


The market has lost its key function of price discovery, its ability to learn and evolve and its inherent buffers and redundancy mechanisms. In a word, the market has lost its “resilience”… 

Our inability as market participants to properly frame market fragility and the inherent vulnerability of the financial system makes a market crash more likely, as it helps systemic risk go unattended and build further up. 

It is this systemic risk and loss of resilience that heightens the likelihood of a crash:

Conventional market and economic indicators (e.g., breaks of multiyear equity and home price trendlines, freezing credit markets, softening global [manufacturing]) have all but confirmed what nontraditional measures of system-level fragility signaled all along: that a market crash is incubating, and the cliff is near. 

But how close is the cliff?

Complex systems like markets, argues Fasanara (and Jim Rickards), are especially vulnerable in this “phase transition zone.”

The butterfly flaps its wings in Brazil and normally that is that.

But in highly unstable conditions, the butterfly flaps its wings and whips up a hurricane off Florida.

Small inputs, that is, have outsized effects under instability… shifting “order” into “chaos.”

What are some of the flapping butterflies that could conjure the hurricane?

Among the eight Fasanara identifies:

Trade war. China. Oil. Trump and the Mueller investigation.

Any one of these —  in theory — could tip markets over the chaotic border.

“Given our overall view for market system instability,” warns Fasanara, “it becomes crucial to monitor upcoming catalyst events, as any of them may be able to accelerate the large adjustment we anticipate.”

Meantime, we remain, suspended in the “magic space between order and chaos.”


Brian Maher
Managing editor, The Daily Reckoning

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Are Stocks Cheap Again?

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Are stocks “cheap” again?

Is it time once again to cast your bread upon the waters… and buy?

Today we rise above the daily hurly-burly of the market… take the long view… and ransack the past for clues about the future.

The major averages were negative for 2018. And the stock market has just emerged from its bleakest December since 1931.

But the market has found a toehold, bleats the consensus. The way ahead is higher. It is time to hunt bargains.

There is doubtless justice here — in specific cases and in the short run at least.

But are stocks cheap overall? And what can you expect for the next 10 years?

In general terms…

If stocks are cheap today, you can expect — generally, again — lovely returns for the following decade.

The reverse obtains if stocks are expensive today.

So once again: Are stocks presently cheap? Is it time to buy?

Warren Buffett’s preferred metric is the TMC/GNP ratio.

That is, the ratio of total market cap to U.S. GNP (which approximates but does not equal GDP).

If the total valuation of the stock market is less than GNP, stocks are cheap.

If it is greater than GNP… stocks are dear.

Mr. Buffett claims this formula is “probably the best single measure of where valuations stand at any given moment.”

Any ratio below 50% means stocks are “significantly undervalued.”

A ratio above 115% means they’re “significantly overvalued.”

Stretching four decades, the TMC/GNP ratio was lowest in 1982 — at 35%.

Not coincidentally, 1982 marked the onset of the lengthiest bull market of all time.

In violent contrast, the TMC/GNP ratio was highest in 2000, at 148%.

The dot-com catastrophe was close behind.

What is the TMC/GNP ratio today, Jan. 9, 2019?


That is, despite the worst December since 1931… by this measure stocks remain “significantly overvalued.”


What does that 127.5% imply for the stock market over the next decade, based on the historical record?

Negative 0.5% returns per year, including dividends.

You can expect negative returns for the next decade — if you take this TMC/GNP ratio as your guide.

Is it an infallible prophet?

It is not. None exists this side of eternity.

But financial journalist Mark Hulbert tracks eight market indicators he deems most credible. And he ranks it among the better of them.

But could negative 0.5% returns per year for the next decade — including dividends — actually be optimistic?

John Hussman captains a hedge fund, Hussman Strategic Advisors by name.

Mr. Hussman is what is known as a “perma-bear.”

Yet his crystal ball occasionally yields frightfully accurate pictures.

For example:

In March 2000 he soothsaid tech stocks would soon plummet 83%. How much did the Nasdaq lose between 2000 and 2002?


He also forecast in March 2000 that the S&P would post negative returns the following decade. It did.

In April 2007 Hussman said the S&P could plunge 40%. His vision was only off slightly. The S&P lost 55% from 2007–09.

And what does Hussman’s crystalline sphere reveal for the decade ahead?

First another question…

Assume you bought the S&P in 1999. You have held ever since — over hill, over dale, through every peak, every valley.

Keep in mind the S&P has raged some 300% since bottoming in 2009.

What has been your average yearly gain since 1999?

4.8% — again, dividends included.

A gain, yes.

But boring old gold would have yielded you a superior return since 1999… incidentally.

Perhaps “buy and hold” should read “buy and hope.”

But to return to the question at hand…

What can you expect for the next 10 years based on current stock market valuations?


At the March 2000 bubble peak, an understanding of market history… enabled my seemingly preposterous but accurate estimate that large-cap technology stocks faced potential losses of approximately 83% over the completion of the market cycle…

At the 2007 market peak, by contrast, stocks were generally overvalued enough to indicate prospective losses of about 55%…

And this market cycle?

In our view (supported by a century of market cycles across history), investors are vastly underestimating the prospects for market losses over the completion of this cycle… We presently estimate median losses of about 63% in S&P 500 component stocks over the completion of the current market cycle.

Kind heaven, no — a negative 63% return!

Take this vision with a heaping spoon of table salt… as you should with any forecast.

And the further out the reading the heavier the dose.

But if a hangover exists in direct proportion to the binge that caused it… investors may be laid up for the next decade.



Brian Maher
Managing editor, The Daily Reckoning

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The 7 Stages of a Financial Bubble

This post The 7 Stages of a Financial Bubble appeared first on 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.


Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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