“It’s the Economy, Stupid!”

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The trade war is taking a heavy toll on China. Chinese growth slowed to 6% in the third quarter, slower than expected and the slowest growth rate since 1992.

That 6% growth represents a sharp drop from the 6.8% growth China registered in the first quarter of 2018. China’s growth still exceeds developed economies by far, but it is notably weak relative to China’s past performance and relative to expectations.

China is the world’s second-largest economy (after the U.S.) and produces over 16% of global output. A 0.5% decline in Chinese output slows global growth by 0.08%, which is nontrivial considering that global growth is expected to be only 3% in 2019, according to the IMF.

More importantly, China’s growth figures are almost certainly overstated.

About 45% of Chinese GDP is “investment” (compared with about 25% for a developed economy), but 50% of that investment is wasted on white elephant projects and ghost cities that will not earn returns. If that wasted investment were subtracted from GDP, China’s actual growth rate would be 5.8%.

Other adjustments for overlooked bad debts and “smoothing” of official figures would put China’s actual growth closer to 4% or even lower.

China’s economy is a house of cards and even government figures are beginning to show that’s true. The real figures are worse. China’s best case is a possible recession and its worst case is a full-blown financial panic.

China is losing the trade wars, losing the public relations wars and beginning to show cracks in the foundation. All are good reasons for investors to keep away.

The news might be bad for China. But it’s good for President Trump, despite the latest impeachment nothingburger.

The economy will be the deciding factor in next year’s election.

The 1992 Bill Clinton election campaign war room had a sign that said, “It’s the economy, stupid.”

That was intended as a constant reminder to campaign staff that they were to focus on U.S. economic performance almost exclusively in their efforts.

Clinton had come from nowhere to become the Democratic nominee and challenge George H. W. Bush, who was running for reelection. Bush’s approval ratings in 1991 were over 90% after he led the successful campaign to oust Saddam Hussein from Kuwait.

He looked unbeatable for reelection in 1992, which is one reason so few Democrats jumped into the race. Yet Bush had an Achilles heel, which was the economy.

The U.S. had a fairly mild recession from July 1990–March 1991. The recovery was weak and most Americans believed we were still in recession in 1992 even though the recession was technically over by then. Jobs are a lagging indicator and many workers who were laid off in 1991 still had not returned to work by 1992.

Clinton’s strategist, James Carville, understood that jobs were more important than foreign policy triumphs. He urged Clinton to run on the economy, and Clinton won.

In fact, presidents running for a second term almost always win reelection unless there is a recession late in the first term. That’s what cost Bush and Jimmy Carter their reelections.

Otherwise, it’s smooth sailing for second-term victories. The good news for Trump is that he fits the mold of presidents heading for reelection.

A new projection by Moody’s shows Trump winning as many as 351 electoral votes (only 270 electoral votes are needed to be president). Moody’s analysis is based on state-by-state economic conditions and historic voting patterns, not polls.

Trump should win all of the swing states (Pennsylvania, Ohio, Florida, Michigan, Wisconsin) and pick up new states won by Hillary Clinton in 2016 (Minnesota, New Hampshire, Virginia). It looks like a victory of historic proportions for Trump — as long as he avoids a recession.

Below, I show you how Trump’s tariff policies have simply resurrected an old American tradition that served the country well for nearly 200 years. Read on.

Regards,

Jim Rickards
for The Daily Reckoning

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Who Has the Trade War Hurt More: U.S. or China?

This post Who Has the Trade War Hurt More: U.S. or China? appeared first on Daily Reckoning.

Yesterday we hazarded a defense of free trade. Here was the rock of our argument:

A free man — even an American — enjoys the right to purchase his wares at the lowest price he can obtain them.

That is, we stood upon “that right which man has to purchase his sustenance where he can obtain it cheapest.”

But today we vacate the defense counsel’s table. Instead we don the black robe… and take our impartial seat in the judge’s chair.

Which party — the United States or China — is winning the trade war?

That is the case before us today.

We first consult the jury — the stock market.

Dow Soars on Trade Hopes

The Dow Jones was up nearly 400 points by 11 this morning.

That is because the president sat down with China’s vice premier this morning to negotiate trade.

At 9:49 Mr. Trump announced:

Good things are happening at China Trade Talk Meeting. Warmer feelings than in recent past, more like the Old Days. I will be meeting with the Vice Premier today. All would like to see something significant happen!

The market spent the remainder of the day in elevated spirits.

The Dow Jones ended the day with a 320-point gain. The S&P gained 36 points, while the Nasdaq added 106.

But to return to the case at bar: Which side is winning the trade war — the United States or China?

The Pro-U.S. Argument

Counsel for the United States enters the following evidence:

China exports far more products to the United States than the United States exports to China.

China is therefore absorbing the worse scarring.

Chinese economic growth already languishes. And year to date, Chinese exports to these shores fell roughly 10% beneath the previous year’s.

Only half of these exports were subjected to stiffened tariffs.

But additional tariffs enter effect on Oct. 15 and Dec. 15.

In the absence of a trade truce, virtually all Chinese exports — some $500 billion worth — will soon come under the ban.

We can then safely project a 20% plunge in Chinese exports to the United States.

That represents a $110 billion hatcheting of Chinese revenues.

In conclusion, runs this argument, China is losing the trade war. The United States is winning.

But no beads of perspiration form about the Chinese counsel’s brow. He appears unruffled.

He bounds from his seat.

With the beaming confidence of a card sharp holding a trick card up his shirtsleeve… he approaches the bench…

The Chinese Rebuttal

“We Chinese,” he informs us, “are superior strategists. Do you not realize that a Chinese fellow wrote The Art of War?”

“We were aware of that, yes.”

He opens by reminding us that the United States manufacturing has plummeted to its lowest level since the financial crisis. And that American exports are severely depressed.

He then declares:

“That $110 billion my opponent referred to? That is, the $110 billion loss American tariffs are inflicting upon us? It does not represent an actual loss to China’s GDP.”

A puzzled expression creases our features…

“It doesn’t?”

He lifts from his briefcase a sheet of official-appearing paper…

Why U.S. Tariffs Aren’t Crushing China

It reveals the research of one Nicholas Lardy. Mr. Lardy is an economist at the Peterson Institute for International Economics (PIIE).

His findings are summarized by Shawn Tully, senior editor of Fortune:

When China sells mobile phones or appliances to the U.S., a big portion of the parts in those and most other products are made in Vietnam, Malaysia, Japan or other countries that feed China’s factories. The value of the components that Chinese plants contribute to the finished goods, plus value of the labor and machinery use in final assembly, account for only half the sales price of the goods shipped to America.

Therefore:

China’s lost production, the decrease in the portion of the products it actually makes, amounts to 50% of the $110 billion total, or $55 billion. That’s the hit to its GDP.

Meantime — this Chinese legal eagle informs us — while the United States seeks higher tariffs against much of the world, China has lowered tariffs against other countries:

“China has raised tariffs on American products, for example. But here is what you may not know: We have lowered tariffs against other nations that supply the same products. We are therefore unharmed.”

China Works Around U.S. Tariffs

He cites the aforesaid Shawn Tully:

China hammered U.S. goods that it could easily purchase from third countries, especially commodities selling on global markets, slapping 28% tariffs on soybeans, 22.3% on wood, paper and metal products, and 19.3% on chemicals. In each case, those duties more than doubled. Meanwhile, China lowered average tariffs to all other countries from 8% to 6.7%. For example, it’s now buying soybeans from Brazil and Argentina at a 3% duty, and Pacific salmon from Japan at 18.9%, cutting purchases from the U.S fisheries on the West Coast that now pay a 42.4% tariff.

Mr. Tully continues:

According to the PIIE economists, China is not paying significantly more for the soybeans, chemicals and other products that it used to buy from America and now sources from Argentina or Canada. Even if the third-party prices are slightly higher, they’re offset by the reduction in tariffs on all non-U.S. suppliers. As a result, say the PIIE economists, China is shouldering virtually no deadweight costs at all. It’s remarkable that U.S. tariffs have driven China to the market-driven, trade-enhancing reform shift of lowering barriers to the rest of the world.

Furthermore, says the Chinese attorney…

“If you Americans think these tariffs are benefiting you so, look at their downstream effects. Your president has handed out $25 billion to your farmers injured by our retaliatory tariffs on their products. That money comes out of the taxpayer’s pocket one way or the other. That’s $25 billion that cannot be spent on additional goods or services. Have you forgotten your Henry Hazlitt?”

A thunderous objection suddenly rises from the American counsel:

“Baseless speculation, your honor! My opponent is not a trained economist.”

We stroke our chin in pensive reflection…

“Objection overruled. We have in fact read Henry Hazlitt. And there is justice in counsel’s argument.”

We instruct the fellow to proceed…

Deadweight Costs

“In all, American consumers and businesses have paid $34 billion in tariffs since the start of the trade war last February through this August. This is according to data from the Trade Partnership and another group called Tariffs Hurt the Heartland. It comes back to deadweight costs, your honor.”

“Deadweight costs?”

“Yes. Investopedia defines deadweight costs after this fashion:

A deadweight loss is a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium… With a reduced level of trade, the allocation of resources in a society may also become inefficient.

“Are not tariffs deadweight costs?

“We Chinese have gotten around them by lowering tariffs on non-American goods. You Americans have not. Some estimates say the deadweight costs from tariffs could cost the U.S. economy $160 billion next year.”

The American counsel once again voices a strenuous objection — and on the same grounds — speculation.

“Sustained. No, overruled. It seems plausible. Please continue.”

The Deadweight Costs to the U.S. Economy

“Your own Congressional Budget Office forecasts that real U.S. GDP will expand $390 billion next year. But without that $160 billion in deadweight costs, your economy would likely expand $550 billion. That is, U.S. GDP would increase 0.9 points without deadweight costs.

“Meantime, deadweight costs from American tariffs only subtract 0.4 points from our own economy because we have lowered tariffs on other nations.

“In conclusion, we are winning the trade war. The United States is losing.”

At which point the Chinese attorney calls upon the testimony of Fortune’s Mr. Tully. From whom:

For the U.S., the tally is 0.1% from lost exports to China and 0.9 points from overpaying for third-country imports for a total of 1.0%. China wins in a 2.5-1 walk away. It’s like winning the Super Bowl 40-16. Losing 0.4% of your growth when you’re expanding at over 6% is a lot easier to bear than losing 1.0% when you’re growing at 2.0%, the predicament for America.

“This is an outrage,” roars the counsel for the United States. “I demand a retrial!”

He promptly wheels 180 degrees… and storms from the courtroom…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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The Nationalist Case for Free Trade?

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Is there a nationalist case for free trade?

That is the question we tackle today, as our thoughts turn to trade…

United States and Chinese trade officials are presently huddled at Washington.

Talks had also been scheduled for Friday. Markets took fright yesterday when it appeared China’s negotiators would back away this evening.

But this morning the president announced he will meet with China’s vice premier tomorrow as planned.

The algorithms that run the stock market sniffed out the news. And the Dow Jones was rapidly 160 points in green territory.

It could not sustain its velocity. But it nonetheless put in a 150-point gain on the day.

The S&P gained 18 points, while the Nasdaq added 47.

Gold, meantime, took a good slating today — down over $14.

Diminished Expectations

The president informed reporters this afternoon that today’s negotiations “went very well.”

But we have dim hopes the warring parties will come to terms this week. Too much light separates and divides them.

Reports the South China Morning Post:

“The U.S. has not changed its extensive and rigorous requests for China, nor has it responded to China’s core concerns,” Renmin University international relations professor Shi Yinhong said.

“Even if there is a deal, it could only be a mini-deal, even a minimal mini-deal.”

Perhaps both sides will agree to further talks… and so dangle another pretty plum before the stock market.

Hope — as is said — springs eternal.

But to return to this question:

Is there a nationalist case for free trade?

Borders Are Obsolete

Free trade is broadly considered a one-worlder’s project.

Many of its drummers, buglers and trumpeters fancy themselves citizens of the world.

They read their sheet music from The Economist or Financial Times — the latter of which exhorts each reader to “be a global citizen.”

Their attachments are loose… as are their national loyalties.

Borders are obsolete, they bellow.

Borders choke the free flow of goods and people. Borders divide rather than unite.

Meantime, free trade laughs at borders… and joins the world in a happy embrace.

Only Donald Trump’s corn-fed, stump-toothed, mouth-breathing “deplorables” are against it.

But to many of these cosmopolitans, free trade is a mere stalking horse for a larger political project.

That project is global governance. And national sovereignty is in the way.

They must therefore knock down fences… and open up borders.

But as economist Joseph Salerno notes, these globalists cannot claim free trade as their own.

Free trade — in fact — has a direct ancestry in nationalism.

The Nationalist Case for Free Trade

Here are some of free trade’s original drummers:

Adam Smith, David Hume, David Ricardo and Frédéric Bastiat — giants all.

Yet they took the national view. Salerno:

Despite their devotion to free trade, the classical economists were nationalists. They viewed free trade as one of the most important means for advancing the security, prosperity and cultural achievements of their own nations…

[They] recognized the existence of profound differences among nations and nationalities and loved their own nations above all others…

Here Salerno cites economist Razeen Sally, chairman of the Institute of Policy Studies:

Hume and Smith stick to considerations of the nation and the national interest as practical objects of analysis. This is a point of absolutely vital importance. Note that Smith does not expatiate on the wealth of “the world”; rather he focuses on the wealth of nations…

This then is the context for Smith’s advocacy of unilateral free trade, which the 19th-century classical economists believe in as well: One or a number of nations adopt free trade independently in their own interest; others, also acting in their self-interest, are likely to follow the example of pioneering free trading nations once the benefits of such a policy become readily apparent.

Next we come to 20th-century British economist Lionel Robbins:

There is little evidence that [the classical economists] often went beyond the test of national advantage as a criterion of policy, still less that they were prepared to contemplate the dissolution of national bonds… I find no trace anywhere in their writings of the vague cosmopolitanism with which they are often credited…

In yet further defense of nationalist free trade, Salerno shovels up the bones of economist Edmund Silberner (dates 1910–1985):

Though hostile to militarism, [the classical economists] make it clear that their attitude is opposed neither to an enlightened patriotism nor to the principle of nationalities…

Despite their abhorrence of war, the classical economists, “with a few exceptions,” were “opposed or hostile” to surrendering national sovereignty to a “supernational peace organization.”

Thus rests the prosecution — free trade was conceived in the national interest.

Yet today’s one-worlders have twisted, bent and stretched free trade out of all semblance.

They peddle a counterfeit good… at least by the lights of the classical economists.

We are heart and soul for free trade. But not because we are globalist.

The Freeman’s Defense of Free Trade

As a citizen of the freest nation Providence has ever set down upon this Earth… we instead take our stand upon the “don’t tread on me” American tradition.

If a Canadian is willing to sell us cheaper timber than anyone else, what authority should stand between us?

If a Chilean is willing to sell us cheaper grapes than anyone else, what authority is to deny us them?

If a Chinaman is willing to sell us cheaper gewgaws than anyone else… what authority can order us to reach deeper into our pocket?

Who indeed.

Thus we speak our piece for free trade — in the defiant spirit of American liberty.

Here we set aside all economic consideration. But let us next turn toward them.

Is the United States winning its trade war with China?

Tune in tomorrow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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America’s Forgotten Depression of 1920–21

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The year is 1921…

America is less than three years removed from triumph on the Western Front. The twenties are set to roar… and the Jazz Age is in swing.

Warren Gamaliel Harding sits at the presidential desk. And the nation is sunk in depression…

U.S. industrial production plunged 31% between 1920 and 1921. Stock prices plummeted 46%. And corporate profits, a crushing 92%.

Unemployment ran as high as 19%. Storefronts nationwide gaped empty.

It was the great bellyache of the day.

Then suddenly it was over. The pain was acute… but the pain was brief.

By 1922 prosperity was finding its legs again.

Welcome to the Forgotten Depression of 1920–1921…

How America skirted depression in the early ’20s is a story seldom told.

But had it been otherwise, the Forgotten Depression may have become known to history as the Great Depression.

Why was it not?

Because the economic doctors of the day let the fever run its course… and let the ailing patient recover on his own.

Despite the Progressive Era’s encroachments and WWI’s assaults, laissez-faire still had roots in American soil — roots both deep and wide.

In the America of 1921 the stock market looked after itself… and buried its own dead.

Business was mostly on its own hook. And banishing the business cycle was not the work of government.

Just eight years old, the Federal Reserve was still in knickers.

Its role at the time was simple and it knew it — to provide liquidity to the banking system in the event of another banking crisis.

It is inconceivable today. But the central bank sat idle as the economic machinery seized heading into 1921.

In the words of one economic historian, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.”

And if you can believe it — you may not — the Federal Reserve actually increased interest rates.

That is correct. It raised rates to 6% in 1921… right into the teeth of depression.

Angels of mercy, no! Raising interest rates in a depression. Didn’t they know?

Not until 1922, after the recovery was well along, did they reduce rates to 4% again.

And once depression broke upon the scene, Harding broke every one of today’s fiscal commandments.

Did he try to spend the country into recovery? Did he raise taxes on the rich?

No and no.

Harding nearly sawed the federal budget in half between 1920 and 1922. He shriveled the national debt by a third. He slashed taxes A through Z.

If Paul Krugman existedat the time, he would have screamed blue murder and set Mr. Harding down as an enemy of the people.

But Harding followed a different set of lights than the good Dr. Krugman…

Imagine — if possible — a contemporary president taking this grim message before the American people:

We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity…

Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic.

Harding prescribed a medicine too bitter for modern America. But it was the proper medicine in the proper dose.

Recovery was underway by the summer of 1921. Unemployment sank to 6.7% by the following year… and a vanishing 2.4% the year after.

Industry was on the jump again.

As one economic historian noted, “The economy rebounded quickly from the 1920–1921 depression and entered a period of quite vigorous growth.”

In summary, the budget was cut… the money supply fell… and interest rates rose.

Deadlier medicine is scarcely imaginable to today’s economic healers.

The great Jim Grant, who wrote a book on the Forgotten Depression of 19201921:

By the lights of Keynesian and monetarist doctrine alike, no more primitive or counterproductive policies could be imagined.

Yet these policies proved so primitive and counterproductive the country was out of depression within 18 months.

The facts are the facts.

But for his efforts — or lack of efforts — Harding has been read out of history altogether.

It was the saint FDR who “saved capitalism from itself” a decade later with his New Deal and assaults upon free enterprise.

But history smiles upon men of action… even if the wrong action.

Inaction makes for dull history. And idle historians.

But if Harding had been the man of action FDR was, the 1920s might have been known as the Great Depression — not the 1930s.

And the term “Roaring Twenties” would probably be as unknown today as Harding himself…

Regards,

Brian Maher
for The Daily Reckoning

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Impeach Everybody

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The president is absorbing a severe battering.

From his left, Democrats seek to bayonet him out of office. They insist his sins against American democracy are of the mortal, impeachable variety.

From his right, the war hawks and bugle blowers rage against him.

They claim he has handed Turkey a permission slip to gobble northern Syria. Northern Syria is thick with Kurdish militias.

Turkey packs a mighty hatred for these Kurds (we refer you to Professor Google for the whys and what-fors).

And it is eager to shoo them as far as possible from its borders.

But the Kurds are true-blue American allies, holler the president’s party critics. The Kurds were instrumental in defeating ISIS, they remind him.

Moreover, Iran and Russia will boss the entire region if the United States withdraws.

No, America must get in back of the Kurds. By natural extension, American boots must remain forever glued to Syrian soil.

A “grave mistake,” Sen. Marco Rubio labels Mr. Trump’s decision. (The wrong graves will fill, we presume.)

Abandoning the Kurds would constitute a “catastrophic mistake,” shrieks Rep. Liz Cheney. Mrs. Cheney is the daughter of “deficits don’t matter” Richard Cheney.

Sen. Lindsey Graham styles Trump’s decision a “catastrophe in the making.” It is further a “stain on America’s honor.”

Just so. But here is one more “catastrophe in the making.” Here too is a “stain on America’s honor”:

We are informed reliably — by the Congressional Budget Office — that the federal budget deficit surges to embarrassing heights.

The Hill, in summary of CBO’s findings:

The federal budget deficit for 2019 is estimated at $984 billion, a hefty 4.7% of gross domestic product (GDP) and the highest since 2012, the Congressional Budget Office (CBO) said on Monday.

The difference between federal spending and revenue has only ever exceeded $1 trillion four times, in the period immediately following the global financial crisis.

The deficit, which has grown every year since 2015, is $205 billion higher than it was in 2018, a jump of 26%.

A 26% jump over last year — at a time when the economy is expanding.

The Keynesian bible counsels governments to run surpluses during bountiful times… when the economic cup floweth over and the tax haul is heavy.

Come the inevitable recession, the national strong box bursts with cash. This cash the government can then shake out into the general economy.

There it coaxes and tickles the snoozing economic machinery into vigor… and lifts the economy out of recession.

The cycle can then begin anew.

But even the old Keynesian religion — once considered profligate — binds too heavily in these liberated times.

It has yielded to the heretic faith of Perpetual Deficit.

The new canon permits the federal government to run deficits at all times, in all seasons… lean or fat.

Can the nation rub along on the estimated $3.5 trillion it will lay out in federal taxes this year?

Or the additional $3.3 trillion it gives in state and local taxes?

That is, on a combined $6.8 trillion of tax money?

Only the iciest stoneheart — or a suicidal politician — would propose it.

Too many snouts are in the trough, guzzling the overflow. To kink the hose would be next door to murder.

The bureaucracies of Washington would take to rebellion. That is, the swamp would take to rebellion.

But it is not only the marshy bogs of the nation’s capital. We the People would likewise wail in protest.

As we have noted before:

We demand a shining military machine with every whistle and bell… heaping doses of Social Security… Medicare… a Rolls-Royce education… a million gaudy baubles.

But we do not wish to pay for it all.

Hand it over, we bark out one corner of our mouth. But don’t dare raise our taxes, we belch out the other.

Many of us say we’re heart and soul for limited government.

But we are heart and soul for limited government… as long as it’s the other fellow’s heart and soul feeling the blade.

Give me that tax break, says the one. No, give it to me, says the other.

You can both go scratching, says the third. I deserve it more.

A fourth files a claim of his own.

Meantime, the hard-luck farmer wants his back scratched. The hard-pressed businessman wants his belly rubbed. The overlabored teacher wants her apple.

And millions more are hard at the business…

All trying to work the angles, to get a bucket in the stream, to get a snout in the trough… to catch a penny.

It is the evil of “special interests” when the other fellow gets his.

But it is “democracy in action” when it butters our own parsnips.

Of course… your editor is no exception. We enjoy having our own parsnips buttered — and in drowning amounts.

We conclude with a modest proposal:

If the president is to be impeached… impeachment proceedings should commence against nearly all elected officials sitting at Washington.

Fiscal irresponsibility should be the charge.

And We the People should be impeached for electing them…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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This Is Your Brain on Stock Market

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Editor’s note: People are irrational creatures. And perhaps never more so than when it comes to the stock market. Today, eccentric former hedge fund manager James Altucher shows you the key to capitalizing on that irrationality.

Dear Reader,

Our brains are messed up. Daniel Kahneman, the Nobel Prize winning economist, calls the ways we are messed up “cognitive biases.”

Our cognitive biases make us sell stocks whenever everyone else is selling. Cause us to buy stocks when everyone else is buying. This is called “herd behavior.”

Another cognitive bias is called “loss aversion.” We’d rather make a bad decision than lose money. So we sell too quickly.

Cognitive biases almost always force us to make bad decisions. This is why markets and stocks sometimes go up too high. Much higher than they should.

And this is why markets go down much lower than they should.

But this creates MASSIVE opportunity if you have an unfair advantage.

Kahneman says, “It’s impossible to act rationally. It’s impossible to get rid of the cognitive biases.” Impossible!

People are irrational all the time. If Microsoft goes down five days in a row, people sometimes think, “That’s it! Microsoft is dead! Time to sell.” And then it keeps going even lower because of the new crazy selling.

What was the news? Maybe Microsoft missed earnings by a penny. Something trivial. But people go crazy.

I go crazy.

So I did what I always do. I wrote software. I took the emotion out of my trading.

Capitalizing on Others’ Irrationality

I knew all the cognitive biases. I had studied them. The stock market is like the collective psychology of the entire planet.

If individuals can make irrational decisions because of these biases, then so can the entire market. So can you. So can I.

My software helped me find 100s of patterns where I was able to prove people were acting irrationally.

If you invest in the opposite direction of millions of crazy people, you make a ton of money.

I didn’t know anyone else doing this at the time. There were a few secretive hedge funds. Some of the patterns I found were unbelievable. I couldn’t believe there were opportunities to make 100%, 200% or even more in a day.

Other patterns were insane. Like if a biotech company has a drug that caused brain cancer… wait two days and then buy.

Other patterns were so consistent I called them “ATM machines.” One time I wrote about one of these ATM machines on a very popular website.

I started day trading more and more money. Top hedge fund managers were even giving me their personal money to trade.

Some days I would trade over $1 BILLION worth of equities. In a DAY.

Patterns Are the Key

All because of my software. I took the emotions out of it. I only traded when the software saw a pattern kicking in.

I’d go out to lunch sometimes and come back and see that the software had found a pattern, made the trade, and already exited with a profit.

I had no job. I had two little babies to feed. I had expenses and little money. I had to make 100% per month just to make my expenses.

And I built a business trading for other people. In my first few months doing this I made over 150% for my investors and more and more people invested with me. Almost every day was a profitable day.

I didn’t know anyone else doing this at the time. There were a few secretive hedge funds doing it.

And then I did it. Then I built a hedge fund and invested in many traders.

I wrote a book about some of the patterns my software discovered. The Stock Trader’s Almanac named it their “Top Investment Book of 2004.” Barron’s listed it as one of the top 10 investment books of the year.

One of the hedge fund managers who had given me money pulled all his money away from me then. “You can share with some people, but not EVERY person.”

“People Are ALWAYS Irrational”

Here’s the thing. Here’s the universal secret about investing:

  • People are ALWAYS irrational. Which means there are always patterns in the market that will make a lot of money. Yesterday. Today. Tomorrow. New patterns.
  • Having software to find new patterns is an UNFAIR ADVANTAGE.

DO NOT INVEST unless you have an unfair advantage.

In 2008 I found new patterns to invest. Patterns that worked every day. While the world was burning, I was making money. I made money on the day Lehman Brothers went bankrupt.

One time in 2009 I was impressing my then-girlfriend by showing her the gym in my building. I had obviously never been there before.

I lived right across the street from the New York Stock Exchange. I saw traders going in and out of there every day. Always depressed.

At the gym, some guy saw me and got off his treadmill and came up to me.

“I have to shake your hand,” he said. My girlfriend was watching.

“How come?”

“My group saw the bankruptcy pattern you wrote about in your book,” he said. “GM went bankrupt today. We made 100% in a few hours and called it a day. So thank you!”

I had forgotten to play my own strategy!

This strategy saved my life over and over again. The biggest opportunities for 100% returns or more are found by betting against irrational behavior.

The hard part is finding the patterns that consistently show you where investors are behaving badly.

And now it’s even harder! The markets are on an incredible 10-year streak.

“People Are Always Fearful. And People Are Always Greedy”

I know many hedge fund managers. Many bankers. And many billionaires have come on my podcast and told me their worst fears.

I ran into a friend of mine who bets on horses. We swapped techniques. “I do something similar,” he said. “I have data like the horses in the race, the track conditions, the prior races, etc. and then I make the high-probability bets.”

He runs a hedge fund doing this that makes about $30–50 million a year in profit.

People are always fearful. And people are always greedy. In every area of life. The markets, horses, relationships, elections.

Often, very often, every day even, they make irrational decisions because of that fear or greed. It might be on a stock (if Microsoft goes down four days in a row after an earnings report), or it might be on the market (like the patterns above).

Some of the patterns don’t last very long. Days or weeks. But others last for lifetimes. These are the ones I try to focus on.

Because of this strategy of using software and artificial intelligence techniques, I have saved my life, made money, started businesses, for the past 20 years.

And the environment is much more confusing, much more chaotic right now.

My #1 Rule

Hedge funds managing billions of dollars are forced to find irrational behavior only in super large opportunities so they can put in billions of dollars a day.

The software I write takes advantage of those big funds and the biases they code into their algorithms. They are forced to ignore the smaller, more nimble, more profitable opportunities.

Around 2003 I shared the software with a bunch of friends. Every morning they would look at the patterns in the market and send me what they thought was the best trade.

Then I would do my own testing, and tell them what trade I was doing based on the software.

Now, rather than doing a hedge fund, or day trading for a big firm, I wanted to share the software some other way.

I don’t want to start a hedge fund. That’s ugly work with ugly people.

Trading should free you from the desk, from anxiety, from the stress of watching every tick up or down in the market.

I wanted trading software from the future. I wake up and it tells me what to do. I make the trade and then I can go on with my life.

And then I found it… A pattern that worked again and again…

One that lasted about 7 days on average. So it would give regular people trading at home a window to invest (and NOT just computer software making a trillion trades per second).

The results have been spectacular.

My rule: I have to have patterns for up markets, sideways markets, down markets, booms and busts.

Regards,

James Altucher
for The Daily Reckoning

The post This Is Your Brain on Stock Market appeared first on Daily Reckoning.

Time to Chuck Conventional Financial Advice

This post Time to Chuck Conventional Financial Advice appeared first on Daily Reckoning.

Dear Reader,

I’m often asked, “How can I get rich in real estate?”

Behind this question is a different question: “How can I get the money I need to invest in real estate?”

More often than not, the people asking me these questions have had ingrained into them from an early age that saving was a means to getting rich and that if they wanted to invest, they needed to use their own money.

Both are myths that I want to discuss as a foundation on how the rich use debt to get rich in real estate — and how you can too.

There’s no doubt about it, from an early age we teach our children the value of saving money.

“A penny saved is a penny earned,” we chime. And when they are a bit older, we spin tales of the magic of compounding interest. Save enough, children are told, and you’ll be a millionaire by the time you’re ready to retire.

Of course, we don’t tell them about historically low interest rates.

Or the power of inflation to eat away at the value of money over time so that being a millionaire is worthless by the time you retire.

Those are inconvenient financial truths.

It seems as if the “wisdom” to save your money is timeless in that it won’t go away, even though it’s proven to be wrong.

It was true during the era of the gold standard because gold was real money that held its value. But it stopped being true after Nixon took us off the gold standard and left us with the unbacked fiat dollar.

I still buy gold to help preserve my wealth. I’m a big advocate of gold because of that reason. But I don’t save paper money that only loses value with time. Neither should you.

But even today you find “financial experts” who push the “save to be a millionaire” myth.

The other side of the save to get rich myth is that you need to use your own money (and a lot of it) in order to invest. This is a byproduct of the cultural belief that debt is bad and savings are good.

Often, people will say that investing in real estate is risky, but if you’re going to do it, try to keep your debt as low as possible. Use your own money and pay off the debt as fast as you can.

Nothing could be more wrong. And it stems from a fundamental misunderstanding about debt, which can be both good and bad.

Let’s take a moment to define what I mean by bad de‌bt and good debt.

Bad de‌bt is money that takes money out of your pocket. It makes you poorer. This can be credit card debt from purchases for things like clothes or TVs. It can even be the mortgage for your personal home.

In short, if it’s not making you money, it’s bad de‌bt.

Good debt is another story, and most people aren’t even aware that it exists. Good debt puts money in your pocket month in and month out. How can this be? Glad you asked. Let’s talk about a concept called OPM, or other people’s money.

Those who are the most successful investing in real estate understand that the best way to get a high return is to have as little of their own money in a deal.

Rich real estate investors spend their time finding the best deals and then present them to other investors who are willing to use their money to fund the deal.

When structured right, OPM allows a real estate investor to secure a valuable, high-return, cash-flowing asset for little to nothing.

(If you want to learn the secret to getting rich in real estate without much money and without working hard, go here now).

Below, I show you why using other people’s money is the best way to get rich in today’s world, much better than using your money. Read on to learn more.

Regards,

Robert Kiyosaki
for The Daily Reckoning

P.S. Volatility has returned to the stock market. The Dow was down another 500 points today. And with impeachment swirling around President Trump, it will likely get worse.

How about an alternate strategy to make money outside the stock market… like real estate?

Did you know you could earn monthly real estate income… WITHOUT the hassle of being a landlord… WITHOUT having to invest in REITs … or even WITHOUT spending a dime of your own money upfront?

It’s true. And I’m living proof. I’ve made a fortune in real estate using these strategies.

Now — for the first time ever — I’m giving away my greatest secrets for earning real estate income…

The LAZY way.

It’s also the cheap way. You can learn how to start making money from real estate with as little as $10!

My strategy has already helped people like:

Brett S. from Indianapolis who says he earned $5,000 the first time he tried this type of strategy….

And Adriel H., who insists you can make $10,000 a month with it…

While Matt M. from Ontario knows someone who used a similar strategy to earn $30,000… for a single day’s effort.

You’ll find over a dozen “lazy” real estate secrets inside my brand new book, The Lazy Way to Invest In Real Estate.

So hurry and click on this link now to learn how to claim yours. Only 495 copies are available today. Don’t let your copy go to someone else.

Click here now for all the details.

Use Other People’s Money for Infinite Wealth

There are two ways to get rich. One way is to use your own money. The other way is to use other people’s money, or as we call it at Rich Dad, OPM. One (using your own money) provides small-to-modest returns, takes a long time to pan out, and requires some financial intelligence.

The other (OPM) provides large-to-infinite returns, creates incredible velocity of money, and requires a high financial intelligence.

Which one would you prefer to use?

Good Debt and Other People’s Money?

Other people’s money (OPM) is a fundamental concept of my wealth strategies and a sign of high financial intelligence. By using both good debt and OPM, you can dramatically increase your Return on Investment (ROI) — and you can even achieve infinite returns.

Good debt is a type of OPM. By way of reminder, good debt is any debt that puts money in your pocket. By contrast, bad de‌bt takes money out. So, a car loan, for instance, is bad de‌bt. You pay for it each month while the car provides no income and in fact depreciates the minute you drive it off the lot.

Good debt, by contrast, would be a loan for an investment property where the rental income pays for the expense of the property, including the debt service, while also providing monthly income.

The downside to good debt is that you can generally only borrow a certain percentage of an asset’s purchase price. In keeping with our real estate example, that is generally around 70 to 80 percent of the purchase price.

Breaking this down, let’s use an example of a $100,000 property for simplicity’s sake. In a traditional deal with a bank, you can only borrow around $70-$80K towards the property. The rest of the money must be made up of equity from another source.

Other People’s Money for Higher ROI

Because of this, you have two choices when you find a worthy investment: use your own money or use other people’s money for the equity needed above and beyond the loan. Provided you structure the deal well, the more you can use other people’s money, the higher your return will be.

In the case of our real estate example, let’s run a few scenarios.

Scenario 1

$100,000 purchase price

$80,000 loan at 5% interest

$20,000 of your own money for equity

Running through a simple mortgage calculator, your annual cost for this loan would be about $8,500.

Assuming you have an income from the property of $11,000 a year after expenses are paid, your total net income would be $2,500 ($11,000 – $8,500).

Your return on investment for this would be $2,500/$20,000 = 12.5%.

Scenario 2

$100,000 purchase price

$80,000 loan at 5% interest

$20,000 OPM at 7% interest

You get paid 50% of net operating income as the finder of the deal.

In this case, your annual loan costs would still be $8,500, but you’d also have an additional cost of around $1,500 for the other people’s money you borrowed for equity based on an assumed 7%. So, total loan and OPM costs would be $10,000.

Again, assuming you have an income from the property of $11,000 a year after expenses are paid, your total net income would be $1,000 ($11,000 – $10,000).

Your fee for putting the deal together would be 50% of the NOI, in this case, $500 (50% x $1,000).

Your return on investment for this would be infinite because you’re making $500 without any money in the deal.

These, of course, are just small numbers for example. In the real world of investment, you can do this at scale and make massive returns and also, as in this example, infinite returns. But it takes high financial intelligence.

Would Anyone Really Give You Their Money Like This?

Many people think it’s a fantasy world that people would just give you money to invest, but that couldn’t be further from the truth. The reality is that most people don’t have time to find good deals. Instead, they rely on people with proper financial education, skill set, and drive to bring deals to them.

My real estate advisor, Ken McElroy, has perfected using OPM. His company, MC Companies, buys apartment buildings. He does all the hard work of finding deals, doing the due diligence, negotiating with owners and lenders, and handling management. In return, people line up hoping to invest their money with him.

Today, Ken does big deals that require a certain type of investor. Not just anyone can invest with Ken. But he started with small deals, like the ones I’m writing about today and worked his way up to big deals.

The Power of Other People’s Money At Scale

As I mentioned earlier, you can use OPM to substantially increase your returns and secure even more assets at scale. Let me show you an example of how that works.

Let’s say that I have $100,000 to invest. I could use that to put down 20 percent on five properties. But using the concept of OPM, I’d rather use that $100,000 to put down 5 percent on 20 properties. I can do this by finding 20 great deals and lining up investors to invest in them.

Here’s how the math works out.

The bank would lend $80,000 for each property, and I would divide my $100,000 into twenty $5,000 segments, using OPM to raise the other $15,000 needed for each property. Again, at 5 percent interest, the payment on the loans would be around $500 per month.

Let’s assume that we’ll pay a little more for our investors’ money and give them 7 percent interest. The money owed to them would be a little less than $100 per month — but we’ll go with $100 to make it simple. So, our total costs would be about $600 per month.

That means we’ll have a cash flow of about $200 per month, which we’ll split with our investors 50/50. We’ll pocket $100 per month or $1,200 per year, and our investors will pocket $100 per month or $1,200 per year.

Adding up the total return for all 20 deals, that’s $24,000 per year cash flow, a return of 24 percent. Not only am I making 6 percent more per year than if I just used my money, but I also have ownership in 20 assets instead of just 5.

Later I can refinance these properties, pay off my investors, get my investment back, and continue to receive cash flow from the 20 properties — an infinite return.

Again, I’m using very simple math here. In real life, the numbers are more complicated and much larger. But the principles are the same. Investing with Other People’s Money takes a high level of financial intelligence. But both Ken McElroy and I both started small and worked into the big apartment deals we do today. You can do the same.

(To learn how to make serious money in real estate starting with as little as $10 and without working hard, go here now).

Be diligent. Continue to increase your financial education. Work hard. And master the fundamentals of good debt and OPM, and you will become wealthy.

Regards,

Robert Kiyosaki
for The Daily Reckoning

P.S. Volatility has returned to the stock market. The Dow was down another 500 points today. And with impeachment swirling around President Trump, it will likely get worse.

How about an alternate strategy to make money outside the stock market… like real estate?

Did you know you could earn monthly real estate income… WITHOUT the hassle of being a landlord… WITHOUT having to invest in REITs … or even WITHOUT spending a dime of your own money upfront?

It’s true. And I’m living proof. I’ve made a fortune in real estate using these strategies.

Now — for the first time ever — I’m giving away my greatest secrets for earning real estate income…

The LAZY way.

It’s also the cheap way. You can learn how to start making money from real estate with as little as $10!

My strategy has already helped people like:

Brett S. from Indianapolis who says he earned $5,000 the first time he tried this type of strategy….

And Adriel H., who insists you can make $10,000 a month with it…

While Matt M. from Ontario knows someone who used a similar strategy to earn $30,000… for a single day’s effort.

You’ll find over a dozen “lazy” real estate secrets inside my brand new book, The Lazy Way to Invest In Real Estate.

So hurry and click on this link now to learn how to claim yours. Only 495 copies are available today. Don’t let your copy go to someone else.

Click here now for all the details.

The post Time to Chuck Conventional Financial Advice appeared first on Daily Reckoning.

No. 1 Proven Way to Keep Your Money

This post No. 1 Proven Way to Keep Your Money appeared first on Daily Reckoning.

Dear Reader,

Pop quiz: When you receive a paycheck, who do you pay first? If you’re like most Americans, you’re probably paying everyone else first — your rent/mortgage, groceries, utilities, car payment, insurance, etc.

Once you’re done paying all those bills, you stick whatever you have left (if anything) into savings — that’s the classic “paying yourself last” scenario. Then you patiently await your next paycheck and repeat the process all over again. But if you ever want to get out of the rat race, then I’m here to tell you you’re doing it wrong.

The philosophy of paying yourself first came from George Clason’s book, The Richest Man in Babylon, which was written nearly a century ago. And its message still holds true today, despite how the world has changed.

In fact, Nasdaq has named it the No. 1 proven way to save money.

People who choose to pay themselves first allocate money to the asset column of their balance sheet before they’ve paid their monthly expenses. Essentially, you set aside a specific amount of money right off the bat, and then live off what’s leftover. And that’s how wealth grows.

If you aren’t doing this now, have no fear — it’s never too late to ditch your bad habits. Learning to manage your money properly now with a “pay yourself first” mindset will ensure you have it to invest later.

How to Pay Yourself First

If you cannot get control of yourself, do not try to get rich. It makes no sense to invest, make money, and blow it. It is the lack of self-discipline that causes most lottery winners to go broke soon after winning millions. It is the lack of self-discipline that causes people who get a raise to immediately go out and buy a new car or take a cruise.

I would venture to say that personal self-discipline is the number-one delineating factor between the rich, the poor, and the middle class.

Simply put, people who have low self-esteem and low tolerance for financial pressure can never be rich. As I have said, a lesson learned from my “rich dad” was that the world will push you around.

The world pushes people around, not because other people are bullies, but because the individual lacks internal control and discipline. People who lack internal fortitude often become victims of those who have self-discipline.

If you have the necessary self-discipline, when you begin paying yourself first, it will feel totally backwards because you’ve been doing it wrong for decades. But trust me, it’s the only way to go.

My wife Kim and I have had many bookkeepers and accountants who have balked at our approach, because they too have grown accustomed to paying themselves last. Even during times when my cash flow was less than my bills, I still paid myself first. And you can too. How?

First, don’t get into large debt positions that you have to pay for. Keep your expenses low. Build up assets first. Then buy the big house or nice car later.

Second, when you come up short, go ahead and let the pressure build — don’t dip into your savings or investments as a bailout. You see, poor people have poor habits. And one of those poor habits is dipping into savings to pay bills.

Use the pressure to inspire your financial genius to come up with new ways of making more money, and then pay your bills with that. Bonus: You will have increased your ability to make more money and boosted your financial intelligence.

So, let’s say you’re taking home about $4,000 a month. If you first pay yourself $500, then you have $3,500 left for living expenses. After one year’s time, you’ll have saved $6,000. You can even set this up automatically with your bank, to remove the temptation of spending the money.

But How Can I Save When I Have Debt?

Kim and I had about $400,000 of debt when we started our lives together in 1984 — but by 1990 we were debt free. Here’s how we did it, and thus, here’s my advice for you:

Step 1: Immediately stop accruing debt that doesn’t help you. Stop adding to your credit card balances.

Step 2: Make a list of all the debt you owe (credit card, school loans, car loans, IOUs to people, your personal residence, etc.) so that everything is clearly organized and accounted for.

Step 3: Hire a bookkeeper so you can’t hide from the truth—he or she will keep meticulous records each month, so you always know where you stand (even if you don’t want to admit it).

Step 4: Kim and I decided that with every dollar that came into our household, we’d take a set percentage off the top and set it aside. Yes, this was the beginning of us paying ourselves first.

We set up three piggy banks: one for savings, one for tithing or charity, and one for investing. We then set the percentage for each piggy bank at 10% each, for a total of 30% of all income we received.

If we received $100, then $10 went into the savings bank, $10 into the charity bank and $10 into the investing bank. We did this with every dollar we received. You don’t have to start off with 30%, but whatever percentage you choose, stick with it each month and increase when possible.

Step 5: Determine the order for paying off each debt by starting with the lowest and working toward paying that off. For all other debt, just pay the minimum amounts due each month. Once your first (lowest) debt is paid off, then work on the next debt (second lowest) and so on.

You Can Still Survive With a Small Cash Flow

There have been times in my life when, for whatever reason, cash flow was far less than my bills. I still paid myself first.

My accountant and bookkeeper screamed in panic,

“They’re going to come after you. The IRS is going to put you in jail.”

“You’re going to ruin your credit rating.”

“They’ll cut off the electricity.”

I still paid myself first.

“Why?” you ask.

Because that’s what the story, The Richest Man In Babylon, was all about: the power of self-discipline and the power of internal fortitude. As my rich dad taught me the first month I worked for him, most people allow the world to push them around.

A bill collector calls and you “pay or else.”

A salesclerk says, “Oh, just put it on your charge card.” Your real estate agent tells you, “Go ahead. The government allows you a tax deduction on your home.”

It’s important to have the guts to go against the tide and get rich. You may not be weak, but when it comes to money, many people get wimpy.

None of My Money Is For the Government

I am not saying be irresponsible. The reason I don’t have high credit-card debt, and doodad debt, is because I pay myself first. The reason I minimize my income is because I don’t want to pay it to the government.

That is why my income comes from my asset column, through a Nevada corporation. If I work for money, the government takes it.

Regards,

Robert Kiyosaki
for The Daily Reckoning

The post No. 1 Proven Way to Keep Your Money appeared first on Daily Reckoning.

The Four Dynamics of Bubbles

This post The Four Dynamics of Bubbles appeared first on Daily Reckoning.

Editor’s note: Central banks have inflated bubble after bubble. Today, Daily Reckoning contributor Charles Hugh Smith shows you the three stages of bubbles – with a fourth for good measure. He also addresses how long the show can go on.

Dear Reader,

Financial bubbles manifest three dynamics: The one we’re most familiar with is simple human greed, the desire to exploit a windfall and catch a work-free ride to riches.

The second dynamic gets much less attention. Financial manias arise when there is no other more productive, profitable use for capital. And these periods occur when there is an abundance of credit available to inflate the bubbles.

Humans respond to the incentives the system presents: If dealing illegal drugs can net $20,000 a month compared with $2,000 a month from a regular job, a certain percentage of the workforce is going to deal drugs.

In our current economy, corporations have sunk $2.5 trillion in buying back their own stocks because this generates the highest work-free return. This reflects two realities:

  1. Corporations can’t find any other more productive, profitable use for their capital than buying back their own shares (enriching the managers via stock options and the 10% of American households who own 93% of the stocks).
  2. Thanks to the Federal Reserve and other central banks injecting trillions of dollars of nearly free credit into the financial sector, corporations can borrow billions of dollars to play with at near-zero rates that are historically unprecedented.

So borrow billions at 2.5%, pour it all into buying back your own stock and reap the gains as your stock rises 10%.

Recall the basic mechanism of stock buybacks: By reducing the number of shares outstanding, sales and profits go up on a per share basis — not because the company generated more revenues and profits, but because the number of shares has been reduced by the buybacks.

(Note to New Green Deal advocates: If corporations reckoned they could earn more by investing the $2.5 trillion in alternative energy projects rather than stock buybacks, they would have done so.)

As various sources have outlined, corporate stock buybacks have been the primary driver of higher stock prices.

This is driving the third dynamic of bubbles:

As the bubble continues inflating beyond any rational valuation, rational investors throw in the towel and join the frenzy. Once again, this willingness to abandon rationality is partly fueled by greed and also by a dearth of other more attractive investments.

A bubble economy is a sick economy, for bubbles are proof there is too much capital chasing too few productive uses for that capital.

The Fed and other central banks have created trillions of dollars, yuan, euros and yen for corporations and financiers to play with and, to a lesser degree, for homebuyers to play with via low mortgage rates and federal guarantees on mortgages.

As a result, the housing bubble is the one regular folks can play. And despite claims that it’s not a bubble because of organic demand, housing is definitely in a bubble, along with stocks and bonds, art, etc.

When you create trillions of dollars, yuan, euros and yen out of thin air, you create the incentives to inflate bubbles. When your real economy is sick and offers few productive uses for all this excess capital, that only adds fuel to the speculative fire.

Here’s the problem: All bubbles burst, regardless of other conditions. Creating more trillions won’t change this, adding more gamblers to the casino won’t change this, claiming a bubble economy is healthy won’t change this and promising a trade deal with China won’t change this.

All of America’s bubbles will pop, and sooner rather than later. The stock market moves a bit faster than the housing and bond markets, but the bubbles that are visible in every market will all burst, much to everyone’s dismay.

We can add a fourth dynamic of bubbles: Nobody believes bubbles can burst until it’s too late to get out unscathed.

Below, we look ahead for the next five years. Will everything change in 2020-2025 or will nothing change? Read on.

Regards,

Charles Hugh Smith
for The Daily Reckoning

The post The Four Dynamics of Bubbles appeared first on Daily Reckoning.

The Key to Fixing Two Broken Paradigms

This post The Key to Fixing Two Broken Paradigms appeared first on Daily Reckoning.

Dear Reader,

Our financial system has been corrupted.

U.S. equity markets have become a hollow shell of their former selves, with 80% of demand fueled by companies buying their own shares with zero-real-interest-rate loans ultimately from the government.

Silicon Valley is now full of bloated “unicorns” — 88 at last count — with venture capitalists capturing most of the profits. And the number of public companies in the U.S. has plummeted 50% in 20 years.

One way out of this mess is to look abroad.

For Americans with a global view, the range of investment opportunities is expanding massively.

Given the limited upside in Silicon Valley — with its soaring price earnings ratios, misplaced environmentalism, and crony capitalist creep — opportunities abroad are beginning to outpace innovative companies in the states.

You might not know it, but Israel’s startup riches remain unparalleled. And did you know that Japanese and Chinese investors are now massively funding Israeli innovation?

Sony has just created a new $100-million fund with an Israeli target. And CTech reports: “In the first half of 2019, Japanese investors backed 34 Israeli companies, up from 28 companies during the entire year 2018.”

It’s incredibly easy to invest in Israel, too. You have direct access to 70 Israeli companies already available on the NASDAQ. And there are many new Israeli IPOs in preparation.

Also, I know everyone’s supposed to hate China these days. But opportunities in China are expanding dramatically today, with world leading initial public offerings, vast new stock markets, and relatively low valuations.

China is formally a communist nation. But in many ways it’s more free market than the U.S. And China has a rich capitalist culture.

In fact, visit China, as I have in recent months, and you will discover that Marx is far less influential there than he is in American universities.

While I am banned from most U.S. campuses for questioning climate change and challenging political correctness, I speak freely before enthusiastic audiences in many of the most prestigious Universities in China. There may well be fewer real Marxists in China than in the U.S.

In a pithy and topical new 2019 book, Charles and Louis-Vincent Gave, the father-son team at Hong Kong’s GaveKal Research, observe: “Japan is a culturally socialist country on which capitalism was imposed, while China is a culturally capitalist country on which socialism was imposed.”

The Gaves now observe that both countries are reverting to earlier cultural tendencies — China to capitalism, Japan (with its aging population) to socialist old age home.

And the Chinese are opening their capital markets increasingly to the West. Also auspicious for tech investments is Xi’s strong endorsement of tech innovation, venture capital, and initial public offerings.

Anticipating this new opening and inclusion of a thousand Chinese stocks on emerging market indexes, some $6.3 billion flowed into mainland Chinese equities in early June.

The bottom line is, the U.S. needs to wake up to restore American capitalism and innovation. Basically, we need new paradigms to replace the old, dying ones.

The way you can identify a broken paradigm is that the problem gets worse the more money you spend on it.

Case in point: Internet security.

We’ve experienced a billion data breaches on the net this year. And we’re seeing paranoia everywhere about “fake news,” spy chips, and fake hate.

Spending on security patches and poultices rises some 20% every year. Yet the number of hacks of private data rose to an all-time record of a billion breaches in 2018.

What I call “the Cryptocosm” (a new internet with the blockchain at its core) will provide a way out of this mess, as it opens the way to an internet architecture based on provable timestamped facts and immutable records.

It will supply a new architecture for the internet and, indeed, ultimately a new architecture for the entire world economy. And it involves troves of new knowledge surrounding bitcoin and the blockchain.

I truly believe blockchain will eventually become the proper foundation for what the internet’s really become — a huge commercial database to connect transactions all over the world. But this time around, with complete security.

You see, the ability to keep a record of every transaction, fully distributed, will instantly add a bulletproof layer of security to the internet. Why?

Because centralization is the biggest threat to internet security that exists today. Currently, all of our login information and credit card details are kept within walled gardens of various companies — Facebook, Amazon, Google, etc.

The problem is, these walled gardens are beacons for hackers. It’s telling them exactly where the important information is being held.

The blockchain, however, distributes all the personal information across the network, just as human intelligence is distributed across the world. It’s not agglomerated in giant data clumps. It provides a timestamped, immutable record of all transactions.

In other words, it’s decentralized. And that is absolutely key to why blockchain will be the foundation for the Internet Reboot.

That’s what I mean when I talk about a new paradigm. Blockchain can provide it.

Then there’s the scandal of global money.

Our misplaced faith in the power of the Federal Reserve to order growth into being by manipulating its monopoly money has led to the capture of Wall Street by Washington and the consequent starvation of Main Street.

The more money that is printed by central banks — and shuffled on international currency exchanges — the less growth and trade we get from it. Even some $17 trillion of negative interest rate securities doesn’t make a dent.

Big banks and financial players now push around some $5.1 trillion every day. That’s roughly 25 times global GDP and over 70 times global trade in real goods and services.

And what does this colossal floating currency game accomplish?

It only enables grasping politicians and toady central banks to steal from the future — your kids and grandkids — in order to pay off favored constituents and politically correct causes in the present.

The blockchain offers a much more honest, efficient monetary system.

Clearly, internet security and the global scandal of money are two of the world’s most obvious broken paradigms. The blockchain offers a way to fix them.

That’s why I’m so tuned in to advancements of the blockchain, and why I believe the heart of most wealth creation over the next 10 years will be the Cryptocosm.

Go here to learn just how big the opportunity is, and how investing in it now can transform your life in the years ahead.

Regards,

George Gilder
for The Daily Reckoning

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