2019 Headwinds Are Getting Stronger

This post 2019 Headwinds Are Getting Stronger appeared first on Daily Reckoning.

In 2017, every prominent economic forecasting entity was shouting from the rooftops about “synchronized global growth.” This was a reference to the fact that not only were certain economies growing, but they were all growing at the same time.

Chinese GDP growth had come down but was still substantial at 6.85%. U.S. GDP growth was posting solid gains of 3.0% in the second quarter of 2017 and 2.8% in the third quarter. Japan and Europe were not growing as quickly as the U.S. and China, but growth was still accelerating from a low level.

Synchronization was a big part of the story. Growth was not isolated and episodic. Growth was fueling more growth in what seemed to be a sustainable way. The world economy was firing on all cylinders.

Then in 2018 the global growth story came screeching to a halt. Japanese growth went negative in the third quarter of 2018. Germany also went negative. Chinese growth continued its drop (6.5% in the third quarter) instead of stabilizing.

The U.K slowed partly because of confusion around Brexit. French growth slid amid riots triggered by a proposed carbon emissions tax. Australian home prices declined precipitously because export orders from China dried up and Chinese flight capital slowed to a trickle due to Chinese capital controls.

The U.S. economy held up fairly well in 2018, with 4.2% growth in the second quarter and 3.5% growth in the third quarter. But much of that growth was inventory accumulation from foreign suppliers in advance of proposed tariffs.

That inventory growth will likely dry up once the tariffs are either imposed or abandoned early this year. Fourth-quarter growth in the U.S. is currently projected at 3.0%, continuing the downtrend from the second quarter.

What happened?

Much of the global slowdown has to do with the high degree of interconnectedness of the global economy and the extent of global supply chains. The flip side of synchronized growth is a synchronized slowdown. Just as growth in one economy can lead to increased exports for trading partners, a slowdown leads to reduced exports.

Still, why has growth slowed down at all?

The answer has to do with debt, Fed policy, political developments, as well as trade wars. Specifically, the U.S. and China, the world’s two largest economies, are discovering the limits of debt-fueled growth.

The U.S. debt-to-GDP ratio is now 106%, the highest since the end of the Second World War. The Chinese debt-to-GDP ratio is a more reasonable 48%, but that figure is misleading because it does not include the debts and guarantees of provinces, state-owned enterprises, banks, wealth management products and numerous other entities that the government in Beijing is directly or indirectly obligated to support.

When that additional debt is taken into account, the real debt-to-GDP ratio is over 250%, about the same as Japan’s.

Debt-to-GDP ratios below 60% are considered sustainable; ratios between 60% and 90% are considered unsustainable and need to be reversed; and ratios in excess of 90% are in the red zone and will produce negative growth along with default through nonpayment, inflation or other forms of debt repudiation. The world’s three largest economies — the U.S., China and Japan — are all now deep in the red zone.

European growth is also slowing down. While the causes may vary, growth in all of the major economies in the EU and the U.K. is either slowing or has already turned negative.

What is striking is the speed with which synchronized global growth has turned to synchronized slowing. Indications are that this slowing is far from over. While growth can create a positive feedback loop, slowing can do the same.

The interconnectedness of global growth was summarized in this quote from Stephen “Sarge” Guilfoyle, director of floor operations for the New York Stock Exchange in a recent column for TheStreet’s Real Money:

There is an old adage, “When America sneezes, the world catches a cold.” What if the world’s two largest economies (U.S. and China) sneeze at the same time? Wait. I can top that. What if the U.S., China, the EU, Japan and the U.K. all sneeze at the same time? What if all mentioned are either involved in trade disputes, and/or the perverse use of both fiscal and/or monetary policies while suffering from heightened political risk? Oh, and at least temporarily, the U.S. faces a partial government shutdown as well. That’s a strong sort of fiscal/political mix.

Well, we already have the partial shutdown, now over two weeks old. On the political front, it’s sufficient to say that the dysfunction is getting worse, not better, and it will have an adverse effect on investor portfolios.

Democrats took charge of the House of Representatives last week on, Jan. 3, and they will use their committee control to launch literally dozens of investigations into “Russia collusion,” Trump’s business dealings, Trump’s inaugural financing, Trump’s tax returns, campaign finance, regulatory reforms, appointments and much more.

But Republicans continue to hold the U.S. Senate. They will use their committee control to hold hearings on FBI corruption, Intelligence Community abuse of spying powers, Hillary Clinton’s private server that held classified information and Democratic coverups on Benghazi, tea party IRS attacks, the Clinton Foundation “pay for play” deals with former Secretary of State Clinton, false accusations related to the confirmation of Justice Kavanaugh and more.

In short, it’s war.

Some of these hearings are political stunts just for show. They will make great headlines over a one-day (or one-hour) news cycle but won’t lead to any substantive charges or changes. Yet other hearings could have grave consequences — especially those that may result in criminal charges, including the Clinton Foundation case.

Hanging over all of this is the specter of impeachment. The impeachment process begins in the House of Representatives. If the president is impeached, the matter is referred to the Senate for a trial. If convicted in a Senate trial, the president is removed from office and the Vice President (Mike Pence) becomes president.

Conviction in the Senate requires a super-majority of 67 votes to remove the president. Republicans currently hold 53 Senate seats. Assuming all 47 Democrats vote to remove the president, 20 Republicans would have to switch sides and vote to remove President Trump from office. This is extremely unlikely to occur.

The worst case for impeachment is that the House impeaches Trump but the Senate does not vote to convict him so he remains in office. The best case is that the House makes noise about impeachment, holds hearings but in the end does not vote to impeach.

Either scenario will be positive for Trump’s reelection chances in 2020. Americans may dislike a lot about Trump’s day-to-day demeanor, but Americans are also fair-minded people on the whole.

They will see impeachment as another over-the-top move by Democrats (like the made-up “Russia collusion” story) and actually begin to sympathize with the president. Trump is also a master at turning attacks around on his opponents.

Whether impeachment happens or not and whether Trump benefits or not is unimportant for investors. What is important is the impact of political dysfunction and uncertainty on portfolios.

There the news is not good.

Regardless of the outcome of impeachment, investors should be prepared for a bumpy ride as headlines swing from good to bad and back again for Trump.

Meanwhile, the Fed is raising interest rates and reducing its balance sheet. The Fed’s balance sheet has been reduced by $375 billion in the past 14 months. That balance sheet is scheduled to fall by another $600 billion this year and $600 billion the following year until the balance sheet reaches a level of $2.9 trillion by the end of 2020.

This kind of extreme balance sheet reduction is entirely experimental. It has never been attempted before in the 106-year history of the Federal Reserve.

Analysts estimate that reducing the balance sheet by $600 billion per year (the current tempo) is equivalent to increasing the fed funds target rate by 1% per year. This implied rate hike comes on top of the 0.25% rate hikes the Fed has been announcing every quarter. QT and actual rate hikes taken together are increasing rates by 2% per year from a 2.5% base, an extreme form of monetary tightening.

The Fed is tightening into weakness and will have to pivot towards easing once it becomes obvious. But it may very well be too late.

The bottom line is that uncertainty reigns and it’s not going away anytime soon. Investors can profit from this with a combination of long-volatility strategies, safe-haven assets, gold and cash.

Regards,

Jim Rickards
for The Daily Reckoning

The post 2019 Headwinds Are Getting Stronger appeared first on Daily Reckoning.

Jerome Powell Caves to Market

This post Jerome Powell Caves to Market appeared first on Daily Reckoning.

Fed Chair Jay Powell just sent the most powerful signal from the Fed since March 2015. 

He has pretty much taken a March 2019 rate hike off the table until further notice. At a forum hosted by the American Economic Association in Atlanta last Friday, Powell used the word “patient” to describe the Fed’s approach to the next interest rate hike. 

When Powell did this, he was reading from a script of prepared remarks in what was otherwise billed as a “roundtable discussion.” 

This is a sign that Powell was being extremely careful to get his words exactly right. When Powell said the Fed would be “patient” in reference to the next rate hike, this was not just happy talk. The word “patient” is Fed code for “no rate hikes until we give you a clear signal.” 

This interpretation is backed up by the Fed’s past use of verbal cues to signal ease or tightening in lieu of actual rate hikes or cuts. Prior to March 2015, the Fed consistently used the word “patient” in their FOMC statements. 

This was a signal that there would not be a rate hike at the next FOMC meeting. Investors could do carry trades safely. Only when the word “patient” was removed was the Fed signaling that rate hikes were back on the table. 

In that event, investors were being given fair warning to move to risk-off positions. 

In March 2015, Yellen removed the word “patient” from the statement. In fact, the first rate hike (the “liftoff”) did not happen until December 2015, but the market was on notice through the June and September 2015 FOMC meetings that it could happen. 

Now, for the first time since 2015, the word “patient” is back in the Fed’s statements, which means no future Fed rate hikes without fair warning. 

For now, the Fed is rescuing markets with a risk-on signal. That's why the market rallied last Friday. But we're not out of the woods by any means. 

The U.S. stock market had already anticipated the Fed would not raise rates in March. Friday’s statement by Powell confirms that, but this verbal ease is already priced in. As usual, the markets will want some ice cream to go with the big piece of cake they just got from Powell. 

The next FOMC meeting is Jan. 30. If the Fed does not repeat the word “patient,” markets could be in for an extremely negative reaction.

Looking ahead to rest of 2019, what are my models and methods telling us today about the prospects for the economy and markets?

The answer to that question requires an overview of many markets and sovereign economies around the world. While forecasts for China, the U.S. and Europe may differ in many particulars, what they have in common is interconnectedness.

For example, a slowdown in China due to excessive debt and trade wars can reduce exports from Europe. In turn, reduced European exports can slow down European purchases of raw materials and other inputs and lead to a weaker euro. 

The weaker euro can translate into a stronger dollar, which causes disinflation in the U.S. That disinflation can increase the real value of debt burdens in the U.S. if nominal growth is lower than the increase in the nominal deficit.

In other words, what happens in China does not stay in China. The world is densely connected. Any sound analysis must consider the ripples spreading out from any one factor. 

We need to look at the synchronized global slowdown, the Fed’s misguided policies, currency wars, trade wars and political dysfunction in the U.S. to arrive at conclusions and forecasts for the U.S. and beyond.

All this takes place against a backdrop of mounting global debt.

According to the Institute of International Finance (IIF), it required a record $8 trillion of freshly created debt to create just $1.3 trillion of global GDP. The trend is clear. The massive debts intended to achieve growth are piling on every day. Meanwhile, many of the debts taken on since 2009 are still on the books.

This is a crisis waiting to happen. The combination of slow or negative growth and unprecedented debt is a recipe for a new debt crisis, which could easily slide into another global financial crisis.

The Fed will have to pivot back to loosening, including a possible reintroduction of quantitative easing. But by then, it may be too late.

Below, I show you why the economic head winds are getting stronger as we begin 2019. What can you do to prepare? Read on.

Regards,

Jim Rickards
for The Daily Reckoning

The post Jerome Powell Caves to Market appeared first on Daily Reckoning.

Today’s “Huge” Jobs Report Is a Bad Omen

This post Today’s “Huge” Jobs Report Is a Bad Omen appeared first on Daily Reckoning.

Markets paced the floor this morning… like a man condemned awaiting word on his final appeal.

For the December unemployment report was due out at 8:30.

A poor jobs report would send stocks spiraling down the greasy pole — again.

The market staggered into 2019 off its worst December since the Great Depression. It is also off to its worst start in 19 years.

Could it absorb another blow?

Economists as a whole forecast 176,000 jobs.

What number did the report actually reveal?

312,000 jobs — a “blowout” number — and the largest monthly increase since last February.

We were also informed that American wages increased a gorgeous 3.2% over the previous December.

Only once since April 2009 has this 3.2% year-over-year increase been equaled.

And the sweet scarlet treat atop the sundae:

The unemployment level increased from 3.7%… to 3.9%.

Come again, you say?

How in the name of all things holy is higher unemployment good news?

For this reason:

It means more Americans are entering the labor force.

If they cannot secure immediate positions, they are counted among the unemployed… and the unemployment rate increases.

In December, 419,000 previously idle Americans volunteered for duty.

And the labor force participation rate increased to 63.1% — up from November’s 62.9%.

Wall Street went and had itself a day at the races…

The Dow Jones stormed back 747 points today.

The S&P surged 84.

The Nasdaq leaped 275 points — a thumping 4% rally.

(The unemployment report alone does not account for today’s raucous numbers. Answer below).

From the cheering section rose exultant gloats and howls today…

“The far-bigger-than-expected 312,000 jump in nonfarm payrolls in December would seem to make a mockery of market fears of an impending recession,” beamed Paul Ashworth, chief U.S. economist at Capital Economics.

“What recession?” mocked Stu Hoffman of PNC Financial.

Jared Bernstein — former chief economist for Joe Biden — says it “looks like the jobs market didn’t get the recession memo.”

Just so.

But let us dispatch a recession memo of our own…

As we have illustrated before, an unemployment rate below 4% is no cause to celebrate.

The proof is clear as gin… and every bit as stiff:

Recession is never far behind when unemployment sinks below 4%.

U.S. unemployment dipped beneath 4% last May.

Unemployment previously slipped beneath 4% in April 2000 — at the peak of the dot-com derangement.

The economy was in recession by March 2001 — less than one year later.

A similar schedule would put this April on recession watch.

Before 2000, unemployment had previously fallen below 4% in December 1969.

The economy was sunk in recession shortly thereafter.

Do we stretch the facts to fit into a theory?

We do not.

Nicole Smith is chief economist at Georgetown University’s Center on Education and the Workforce.

From whom:

If we look historically at other times when the unemployment rate has fallen below 4%… what we find is that the low unemployment rate is often associated with a boom phase just before a recession. It’s almost a precursor for a recession or a precursor for another slumping economy.

Perhaps you are unconvinced.

We therefore hammer you upon the head with the following evidence — a chart giving the history since 1950.

On each occasion the unemployment rate fell below 4%, it reveals, recession was on tap:

Chart

Of course… recessions are not always occasioned by unemployment rates below 4%.

But once again, the chart proves it beyond all cavil:

When the official unemployment rate sinks beneath 4%… recession is close by.

In pleasant reminder, unemployment presently hovers at 3.9%.

But why should recession rapidly follow peak employment?

Mainstream economics equates extremely low (official) unemployment with an “overheating” economy.

Central banks must therefore raise interest rates to lower the temperature, to bring the business under control.

Our own central bank has been following the operator’s manual.

But instead of slowing things down… the clods end up slamming the engine into reverse.

As the following chart informs us, rising interest rates preceded each U.S. recession since 1950:

Chart

Confirms analyst Jesse Colombo:

Economic recessions, financial crises and bear markets have occurred after virtually all Fed rate hike cycles, and there is no reason to believe that the current one will be an exception.

Which brings us now to Mr. Jerome Hayden Powell, chairman of the Federal Reserve System…

He appears to be a man with a bit between his teeth.

He has seemed determined, that is, to increase interest rates at any excuse.

Last month, for example — as the stock market was plunging into correction, no less — he went ahead anyway.

Many analysts believed the continued stock market horrors would back him off.

But will today’s go-go jobs report encourage him to press ahead?

MarketWatch on Powell’s dilemma:

On the one hand, the markets are reflecting fears of a deceleration in activity, but more fundamental sources of information on the economy show the danger of an overheating economy remain present.

“This will be very difficult for Powell to reconcile,” warns Carl Tannenbaum, chief economist at Northern Trust.

But what does the man himself have to say?

Powell addressed the American Economic Association this morning.

His comments suggest a new flexibility

He said he is “prepared to adjust policy quickly and flexibly.”

What about the balance sheet?

We contend that quantitative tightening (QT) has throttled markets far more than a series of pinprick rate hikes.

Last month Powell said QT was running “on autopilot,” a remark that sent stocks careening.

Not today.

The chairman said this morning the Fed is “listening carefully” to markets.

He further pledged to announce a halt “if needed,” adding, “We wouldn’t hesitate to change it.”

By sheerest coincidence… the Dow Jones jumped 400 points following the remarks.

We can only come to one conclusion:

The Federal Reserve will never truly “normalize” its balance sheet — despite all gabble to the contrary.

Wall Street will simply not allow it.

But it will not be enough to keep the show going.

We stand by our 2019 forecast:

Dow 18,000 by year’s end.

And recession — just look at the unemployment rate.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Today’s “Huge” Jobs Report Is a Bad Omen appeared first on Daily Reckoning.

Where the Stock Market Will End 2019

This post Where the Stock Market Will End 2019 appeared first on Daily Reckoning.

Yesterday we ventured a cowardly 2019 forecast, in humble recognition of our erring psychic vision.

Markets would rise, we soothsaid — or fall — or end the year precisely where they began.

We likewise predicted the economy would advance, retreat or jog in place.

Some readers denounced our abject cowardice.

Take your stand upon one hill or the other, they thundered. But take your stand:

“Make a call,” demanded one reader, Michael by name. “We are counting on you to make actual predictions…”

“Please do not waste my time with something that says nothing,” argued another reader, Richard.

A third — Gary — believes our dish of applesauce actually diminished his cognitive powers:

“I think I lost IQ points in reading the article… So you know nothing…. Why publish it?”

Our character thus slandered, today we summon our best blood — “not the blood of our finger but the blood of our heart”…

And come out flat-footed with a 2019 forecast guaranteed to keel you over.

First we train our sights on a far more immediate vista — today’s market activity.

But perhaps it is best we not…

The Dow Jones hemorrhaged another 660 crimson points today.

The S&P lost another 62. The Nasdaq shed 202 dreadful points — a 3% trouncing.

What accounted for today’s thunder and lightning?

A falling Apple, primarily.

Apple slashed its quarterly revenue forecast late yesterday — for the first time in over 15 years.

CEO Tim Cook cited an “unforeseen” slowdown in the Chinese economy.

And so a bellwether of global economic conditions presents a distressing omen. Explains Greg McKenna, markets strategist at McKenna Macro:

That Tim Cook and his company mentioned China as the reason behind the downturn in the company’s outlook seemed to hit exactly the pressure point traders and investors were already alarmed over. 

Apple stock plunged 10% today… incidentally.

But it was not Apple alone that frightened the horses today…

The Institute for Supply Management reports that U.S. manufacturing has plunged to a 15-month low.

Manufacturing sentiment also suffered its largest one-month drop since October 2008 — when the financial crisis was in full blast.

On that note…

We are reliably informed that global liquidity is evaporating at its fastest clip since 2007–08.

According to analyst Michael Howell of the CrossBorder Capital blog, global liquidity has slipped some 25% below its long-term trend.

The Federal Reserve is driving the business.

It is tightening financial conditions far more than generally realized… once we account for quantitative tightening.

Howell estimates the “true” fed funds rate is not the official 2.5% — but closer to 5%.

“In other words,” says he, “tight liquidity conditions are equivalent to the Fed undertaking around 20 rate hikes rather than the nine it has so far implemented this cycle.”

Thus the ground is laid for another 1997 Asian crisis — though not limited to Asia:

Unlike the 200708 crisis, which was more about a broken banking system involving the sudden collapse of leverage among overextended banks and shadow banks, the current credit squeeze looks more like the 199798 Asian crisis when central banks, led by the U.S. Fed, tightened the supply of primary liquidity… This time around, financial markets are probably even more interconnected and more global. Consequently, this could be an Asian crisis-like sell-off, but one not only confined to Asia.

Perhaps someone should alert Jerome Powell?

But to return to our thumping market prediction…

We have suggested previously that the Federal Reserve’s most recent rate hike may have taken the fed funds rate over the “neutral rate.”

That is, interest rates are no longer “accommodative.”

Nor are they merely neutral.

They begin to drag and tug.

History suggests recession or market crisis is on tap six–12 months after rates cross the neutral line.

Furthermore…

The stock market generally turns in its worst performance six months preceding a recession.

Well, it has pointed south since early October — for precisely three months, that is.

At present speed and heading, the economy is on course for recession by April perhaps.

Unless, that is, the stock market finds a fair wind beforehand.

We have further furnished evidence that the “true” money supply is falling violently (see linked article for details).

Chart

Let the record show:

Recession or credit crisis followed previous occasions when the true money supply decelerated at the present clip:

Chart

The chart suggests trouble starting in March.

In conclusion… we have strong circumstantial evidence pointing to recession sometime this year.

March 1 — incidentally — is when Trump’s hard trade deadline with China lapses.

If no accord is reached by March 1, the trade war resumes at full pitch.

Mixing it all together, let us proceed to our rafter-shaking 2019 forecast:

Trump realizes the extent to which his presidency hinges upon a thriving economy and stock market.

He will therefore settle upon a deal and declare resounding victory.

The stock market will rally hard on the news.

But it will be short-lived.

Political uncertainty will play the devil with markets…

The Mueller investigation will soon come out.

We hazard it will reveal no evidence whatsoever of Russian collusion.

But give a man nearly two years and millions of dollars to find skeletons in closets… and he will find skeletons in closets.

Especially, we may add, if he ransacks the closets of a horse trader like Donald John Trump.

Once the Democrat-controlled House impeaches Trump — yes, that is correct — exhausted markets will lose remaining steam.

This will drag on much of the summer.

Trump will survive — the Senate will not convict him of charges — but the process will leave him severely diminished.

Meantime, markets will confront the reality of drying liquidity… and economic growth will slow to a glacier’s pace.

The economy will finally be in recession by December.

The stock market will likewise end 2019 sunk in a bear market…

The Dow Jones will end the year at roughly 18,000.

The S&P will hold above 2,000 — but barely.

The Nasdaq will take a good 40% lacing from today’s levels.

Gold will challenge $1,500.

There is your preview of 2019, down to the last jot and tittle, down to the last decimal point — and you can just take it to the bank.

Never you mind our last prediction. Or the prediction prior. Or…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Where the Stock Market Will End 2019 appeared first on Daily Reckoning.

REVEALED: 3 Wild Market Predictions for 2019

This post REVEALED: 3 Wild Market Predictions for 2019 appeared first on Daily Reckoning.

A new year is upon us.

It is time to ring out the old, as Tennyson counseled — and ring in the new.

So today we retrieve our crystal ball from mothballed storage… and gaze for previews of 2019.

Is this finally the year of the bear? Or will the bulls roar back to life?

Are we months away from recession? Years away? Or days away?

The shocking answers anon.

But before we chart the way ahead, let us first take stock of where we stand today.

Stocks concluded the year with their worst December since the Great Depression.

Both the Dow Jones and S&P came within an ace of tumbling into bear markets — a bear market defined as a 20% fall from the most recent height.

Only a fevered Dec. 26 rally kept the bears officially at bay.

But what was responsible for the Dow’s 1,086-point leap?

The folks at Phoenix Capital sniff a rodent:

“Someone” took advantage of the extremely light holiday volume to ramp markets higher via indiscriminate buying…

This was a clear and obvious buying program made by “someone” who didn’t want stocks to officially enter a bear market by falling 20%. One of the key “tells” that this was manipulation is that underperformers like banks and homebuilders didn’t lead the rally.

Normally during real market bottoms, the underperformers turn first and rally hardest as REAL buyers and value investors put in REAL buy orders.

That didn’t happen. Both sectors lagged on the bounce.

But who might this “someone” be? And why the hijinks?

We’ve put our agents on the case.

In the meantime one fact remains, clear as gin:

Global stock markets hemorrhaged $12 trillion in 2018.

These were the largest losses since 2008 — and the second largest on record.

And so markets stagger into 2019 bloodied, battered, bandaged… like Napoleon limping home from Russia.

The new year began this morning where the old one ended, with stocks in retreat.

Weak manufacturing data out of China and Europe came out overnight, confirming the global economy is grinding to a crawl.

Stocks later rallied on rising oil prices. Our friends the Saudis are reportedly cutting exports, lifting energy stocks.

The Dow Jones, S&P and Nasdaq all scratched out modest gains by the closing bell.

But what will determine the fate of markets this year?

Analyst Adam Shell in USA Today:

“Market returns in 2019 will hinge on Fed interest rate policy, whether the economy can continue to grow and avoid recession and whether the U.S. trade fight with China can be resolved.”

Just so.

But doesn’t hinge No. 2 pivot upon hinge No. 1? And is either truly independent of hinge No. 3?

What are the odds of them all swinging in the right direction this year?

The Federal Reserve has given every indication it will proceed with additional rate hikes this year — at least two.

Incidentally… rate hikes are not generally considered antidotes to bear markets.

Peter Boockvar, CIO at Bleakley Advisory Group, says forget the technical definition of a bear market.

Stocks are already sunk in one — and will be for a good long time:

“We are in a bear market, and a bear market is not just going to end in a couple of months considering the 10 years of a bull market.”

Assume for the moment a bear market is upon us.

When might it end?

From our trading desk weighs in Greg Guenthner of The Rude Awakening:

The first half of 2019 will feature negative headlines about the trade war, rising rates, a stalling housing market and an economic slowdown that will contribute to wild swings and bear market action. Trade war fears and other political shenanigans dominate the news cycle and stocks will suffer.

So much for the first half of 2019. What about the second half?

But when the worst-case scenarios don’t materialize and the last seller turns out the lights, stocks will bottom and a new rally will begin, leading to a strong fourth-quarter performance.

We are not convinced.

So now we come to our own jaw-dropping predictions for 2019 — predictions guaranteed to knock you to the floor…

Prediction No. 1:

In 2019 the stock market will rise. Or fall.

Or — or — it will end the year precisely where it began.

Prediction No. 2:

Bitcoin, gold, oil, United States Treasury notes and all remaining assets will rise, fall, or hold steady.

Prediction No. 3:

The economy will expand in 2019 — unless it contracts.

Bear in mind… the economy may do neither.

There you are — three thundering predictions for 2019.

And remember, fortune favors the bold.

What’s your big market prediction for 2019?

Let us know: dr@dailyreckoning.com.

Below, Robert Kiyosaki shows you his 2019 outlook. Is this the year the bubble finally bursts? How should you approach this year? Read on.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post REVEALED: 3 Wild Market Predictions for 2019 appeared first on Daily Reckoning.

The Government Could Shut Down Tonight

This post The Government Could Shut Down Tonight appeared first on Daily Reckoning.

Remember the “tea party” revolt in 2009–2010 against government bailouts and government spending? Remember the “fiscal cliff” drama of Dec. 31, 2012, when Congress raised taxes and cut spending to avoid a debt default and government shutdown? Remember the actual government shutdown in October 2013 as Republicans held the line against more government spending?

Well, congratulations if you do, because everyone else seems to have forgotten.

The days of caring about debt and deficits are over. Republicans passed the Trump tax cuts that will increase the deficit by $1.5 trillion on a conservative estimate, and probably much more. Then Republicans and Democrats “compromised” on eliminating caps on defense spending and domestic spending by agreeing to more of both.

That repeal of the so-called “sequester” will add over $300 billion to the deficit over the next two years.

Then there’s a tsunami of student loan debts in default that the Treasury has guaranteed and will have to pay off. Finally, the higher interest rates from this debt will add $210 billion to the annual deficit for every 1% increase in average federal debt funding costs.

Today we are looking at $1 trillion-plus deficits as far as the eye can see. That’s extraordinary enough. What is more extraordinary is that no one cares! Democrats, Republicans, the White House and everyday Americans are all united in totally ignoring the fact that America is going broke.

This euphoric mood in response to more spending won’t last. The growth is not there to pay for the tax cuts, and the economy is not even growing fast enough to keep up with the growth in the debt. Credit rating agencies are preparing reviews that will likely lead to a downgrade in the U.S. credit rating and higher interest costs for the Treasury.

When the crisis of confidence in the dollar and related inflation arrive, there will be no particular party to blame. The entire system is turning a blind eye to debt, and the entire system will have to bear some part of the blame.

We have a highly dysfunctional political system, with plenty of blame to go around.

Which brings me to a looming government shutdown scheduled for midnight tonight if a budget deal cannot be worked out.

Each fiscal year (Oct. 1 through Sept. 30) the government must be funded either through individual appropriations bills for separate departments and agencies or through “omnibus” legislation that funds multiple agencies with one gigantic bill that very few members of Congress actually read.

Any failure to pass an appropriation bill or omnibus bill on time results in the affected agency or the entire government shutting down at least with respect to “nonessential” personnel.

If a deadline is going to be missed, the Congress can pass a “continuing resolution,” or CR that keeps the government open using the prior year’s spending levels until the new appropriation can be worked out.

Eventually the appropriations bills must be passed, which is why they are the one vehicle where some bipartisan cooperation is needed.

Currently, a December 7 continuing resolution has been extended by two weeks to today because of the death of former President George H.W. Bush and the subsequent congressional activities surrounding his funeral services.

We can expect either a decision on a funding agreement by midnight tonight, another continuing resolution, or a federal government shutdown.

President Trump has insisted that over $5 billion be apportioned to fund the border wall that he promised during his campaign. Last year Trump suffered a political defeat when he didn’t get his funding. This year he seems determined to get it.

The House has actually passed a spending bill that allocates $5.7 billion for the wall. But it has to pass the Senate in order to go ahead. Senate Minority Leader Chuck Schumer has insisted that it wouldn’t get through the Senate. But Trump insists he won’t sign the bill unless it includes funding for the wall, and he says he’s prepared to let the government shut down:

“If the Dems vote no, there will be a shutdown that will last for a very long time.”

This could come right down to the wire. It no deal is reached the government will (partially) shut down. You might not remember, but the government actually shut down for two days back in January. Before that, the last shutdown occurred in 2013, which lasted 16 days.

But despite pervasive political dysfunction in Washington DC, there is one important piece of legislation that I expect to achieve bipartisan support in the coming months. This legislation would be a one-trillion dollar infrastructure spending bill that would extend its spending to all fifty states.

Both parties agree that enormous improvements are needed in highways, bridges, airports, railroads and public amenities. Democrats like infrastructure spending because most of the jobs created are union jobs that offer relatively high pay and benefits.

Republicans like infrastructure spending because the suppliers include firms that provide steel, heavy equipment, cement, asphalt and the technology behind the operating systems.

Both parties like infrastructure spending because it’s popular with voters and results in tangible progress unlike the intangible benefit programs that voters can’t see.

The Democrats can support “jobs, jobs, jobs” while the White House can say they’re out to “Make America Great Again.”

It’s a win-win for the two parties and the voters.

Of course, a bill of this type will add one-trillion dollars to the deficit, but at least politicians could claim that the benefits to the economy in terms of wages, equipment sales, safer highways and airports and reduced travel times will outweigh the added deficits; the new infrastructure will produce added growth for the economy.

Best of all, the infrastructure spending would be “made in America.” These are not the kind of projects that can be outsourced to Mexico or China. The projects would use U.S. steel, U.S. equipment and U.S. workers. At a time when the U.S. political process is breaking down into acrimony and accusation, both parties might like a bill the benefits the country and makes the politicians look reasonable.

Funding the Department of Transportation, which oversees infrastructure spending, could be the catalyst for companies that provide materials for structural improvements to the nation’s highways and bridges.

This is a great opportunity for investors who take advantage of the infrastructure spending spree that could begin soon.

Regards,

Jim Rickards
for The Daily Reckoning

The post The Government Could Shut Down Tonight appeared first on Daily Reckoning.

The “True” Money Supply Is Plunging

This post The “True” Money Supply Is Plunging appeared first on Daily Reckoning.

The battered bulls sprung from the mat this morning, dukes up and fighting mad.

All three major averages rallied hard in early trading.

But late morning the bears landed another clout… and the bulls were back on the canvas, taking the count.

The Dow Jones ended the day down another 220 points.

The S&P lost 30; the Nasdaq, 195.

We now have it on excellent authority — Deutsche Bank — that 2018 is the “worst year on record.”

The bank tracks some 70 asset classes. These include global stocks, bonds, commodities, currencies, real estate — everything, A through Z.

And 93% of these assets are negative on the year… eclipsing the 84% mark set in 1920.

Here is your graphic proof:

2018: The Worst Year Ever

For perspective on the profound difference one year can make, consider:

Only 1% of these asset classes yielded negative returns last year — 1%.

And this year… 93%.

Might central banks somehow account for the Jekyll and Hyde act?

Do not forget, the Federal Reserve commenced quantitative tightening (QT) last October.

Foreign central banks are likewise tightening the taps, though to a lesser extent.

Deutsche Bank:

This is what happens when the vast majority of global assets are expensive historically due to extreme monetary policy… It’s perhaps not a surprise that in this time major… central banks have moved from peak global QE to widespread QT.

As a Daily Reckoning reader, you are likely chockablock with knowledge of quantitative tightening.

But let us now direct your attention toward monetary analysis of which few are aware.

That is, let us consider the “true money supply,” or TMS.

Economists of the “Austrian School” crafted the metric in the 1970s and ’80s.

Existing measures of money supply gave false readings, they claimed.

The true money supply consists of cash, demand deposits (i.e., checking accounts) at banks, savings… and government deposits at the Federal Reserve.

That is, it consists of money immediately available for transaction. It excludes money market funds, for example.

As Austrian economist Frank Shostak explained in Strategic Intelligence:

We take the figures published by the Federal Reserve and remove some items that shouldn’t be there and add some items that should. For instance… they include money market funds. (A money market fund is an investment in income-paying securities. It’s not really money in the sense that money sitting in your checking account is.) What we’re doing is removing all the transactions of lending and credit, and we only add those items that are pure money, which are claim transactions, like demand deposits.

This TMS business is complicated… and we refer you to Professor Google if its inner wizardry interests you.

But here our tale acquires its point…

If the TMS is a reliable weather vane of monetary conditions… the breeze is dying.

As analyst Jeff Peshut at the financial blog RealForecasts.com said earlier this year:

“It’s easy to see that the growth of TMS could grind to a halt and even begin to contract later this year.”

It appears that moment has come.

Here, the variable winds of the “true money supply” since 2003:

The 'True Money Supply' Is Plunging

Note the red arrow to the right.

Does it not align with the arrow on the left… that preceded the 2008 financial crisis?

Economist Joseph Salerno helped develop the TMS.

Says he:

What is of great interest is that the recent deceleration of monetary growth (the second red arrow) almost exactly matches in extent and rapidity the monetary deceleration (the first red arrow) that immediately preceded the financial crisis of 2007–08.

But perhaps Salerno chases a shadow, a phantom, a chance correlation trussed up as evidence.

No, he insists. He stands on solid bedrock, his eyes glued only to fact:

The qualitative relationship between TMS growth, credit crisis and recession has been remarkably clear since 1978.

He hauls forth the following chart in evidence:

Credit Crisis or Recession?

Let the record show:

Recession or credit crisis followed previous occasions when the true money supply decelerated at the present clip.

Not to the month, day or hour, of course.

But economies run to a lagging schedule.

Does the foregoing mean recession — or credit crisis — will soon be upon us?

The top-right line in the chart suggests a recession starting in March.

We take any economic forecast with truckloads of table salt — as should you.

But given its record, this true money supply rates a serious consideration.

This Wednesday Jerome Powell said quantitative tightening will proceed apace — on “autopilot” no less.

He further believes monetary policy is presently approaching “neutral.”

But if the true money supply is a reliable indicator, it is already in violent reverse…

And the economy is speeding for a brick wall.

Meantime, a government shutdown is looming for midnight tonight in the absence of a budget deal. Trump has threatened “a shutdown that will last for a very long time” if denied funding for the border wall.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post The “True” Money Supply Is Plunging appeared first on Daily Reckoning.

Jerome Powell Crosses the Rubicon

This post Jerome Powell Crosses the Rubicon appeared first on Daily Reckoning.

Mr. Jerome Powell entered this day hung from the hooks of a mighty dilemma.

Should he deliver another rate hike… or hold steady?

In two opposite directions he was yanked plenty hard…

His inner lights, his inner mother-in-law, urged him to hike.

GDP expanded an average 3.85% the two most recent quarters, they reminded him.

Unemployment — at 3.7% — plumbs depths unseen in a half-century. Wages are on the upswing.

Loading the scales in favor of a hike was the eager American consumer.

November retail sales jumped 0.9% — a Reuters poll of economists had forecast only 0.4%.

In all, an accelerating economy justifying a foot on the brake.

Bloomberg in summary:

“These conditions speak of an economy at full capacity and don’t square with the current benchmark interest rate of just 2.25%.”

Bank of America CIO Michael Hartnett took the business one further.

Should Powell not hike today, he counseled, a stock market rout would ensue.

“What does the Fed know?” would be the market’s response.

A recession would be the answer.

Thus, Hartnett feared a nay would “prompt U.S. stocks to join the global bear market.”

There, in a walnut shell, the aggregated case for a rate hike today.

But from the opposite direction, Wall Street — and the president — pulled Powell violently.

The stock market rests precariously upon a teeter-totter as things stand. Another rate hike may tip it right over, they warn.

And another rate hike could take the oomph out of the economy.

There is justice in their argument…

The Dow Jones has lost some 3,000 points since early October. The S&P and Nasdaq have been similarly trounced.

And half the S&P trades in bear market country.

Are these conditions that warrant a rate hike?

No, says Bloomberg — not if history is a guide:

It’s exceedingly rare the Federal Reserve raises interest rates when stocks are behaving this badly.

In fact, were policymakers to follow through with their widely expected hike Wednesday, it would be the first time since 1994 they tightened in this brutal a market. Right now the S&P 500 is down over the last three, six and 12 months, a backdrop that has accompanied just two of 76 rate increases since 1980.

And the United States economy?

GDP has been expanding, yes — but the trend is down: 4.2% for the second quarter, 3.5% for the third and fourth-quarter GDP estimates come in at roughly 2.4%.

And most 2019 projections range between 2–2.7%.

Meantime, first-quarter business investment expanded at a roaring 11.5% clip. By the third quarter… it was reduced to a sickly 2.5%.

Furthermore, the credit markets have ground to a standstill… like a seizing engine.

And where — exactly — is inflation? asks the anti-rate hike crowd. The Federal Reserve cannot even swing a lowly 2%, they moan.

And it wants to hike rates?

Atop it all the global economy has caught a flu — a contagious flu.

Explains renowned hedge fund manager Stanley Druckenmiller in The Wall Street Journal:

Global trade growth also slowed markedly, running about one-third lower than earlier in the year. Growth in some important economies, like China, is significantly weaker. No ocean is large enough to insulate the U.S. economy from slowdowns abroad. And no forecasting model adequately captures the spillovers and spillbacks between the U.S. economy and the rest of the world.

So if you think current conditions warrant another rate hike, critics conclude, you are far off the facts.

Adding to the doomy chorus was a voice with a Queens accent, rising from his residence at 1600 Pennsylvania Ave.:

It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. 

But would Powell listen to the man who appointed him?

Strangely, the stock market was in jolly spirits leading up to today’s announcement.

The Dow Jones was up some 300 points by noon. The S&P and Nasdaq were similarly enraptured.

Were they expecting good news?

Then at 2 p.m., with all eyes centering, the white smoke billowed from the Vatican chimney… and word came down…

A rate hike it wasto 2.50%.

Powell tuned out the whines and put aside all pleas for mercy — including the president’s.

The stock market took a severe stagger when the announcement crossed the wires. It soon went over… and remained flat on its back the rest of the day.

After being up 300 points at noon, the Dow Jones closed the day down 352 points — a 652-point whiplashing.

The S&P ended 39 points in red; the Nasdaq, 147.

“I think the market reaction to all of this is the Fed is going to overdo it,” says James Paulsen, chief market strategist at Leuthold Group, adding:

“How else can you look at this than it just smells, at a minimum, like a really big slowdown in the economy coming, maybe even something worse.”

Mr. Powell held court at 2:30 in explanation of the decision.

His statement carried a noteworthy revision concerning the “neutral rate.”

As we have explained previously, the neutral rate neither stimulates nor depresses.

Hence it is neutral.

Rates stimulated for a decade. But no longer.

“Policy at this point does not need to be accommodative,” said Powell today. “It can move to neutral.”

The Fed concluded in September that the neutral rate ranged somewhere between 2.8% and 3.0%.

But today it claims the neutral rate may be as low as 2.5%.

Thus, by its own telling, the Fed concedes it is hard against the neutral line.

But as we have discussed recently, today’s rate hike may have actually crossed over the neutral rate.

You can see trouble is on tap once the fed funds rate (blue) crosses the neutral rate (red) — at least since the early 1980s:

Don't Cross the Neutral Rate!

You can also see that the blue line is presently rising past the red.

The record shows something usually snaps six–12 months after the Fed crosses the neutral line.

The arithmetic therefore puts June 2019 on watch — if the theory holds.

But Mr. Powell’s statement today contained a message perhaps even more distressing for markets.

Answer tomorrow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Jerome Powell Crosses the Rubicon appeared first on Daily Reckoning.

Who’s in Charge of Wall Street?

This post Who’s in Charge of Wall Street? appeared first on Daily Reckoning.

Anarchy is amok on Wall Street, a scene of riot.

“Neither the bulls nor the bears are in charge,” cries Michael Kramer of Mott Capital Management.

Thus we find bull and bear, bovine and ursine, pitted in savage brawling, each battling for control of the nation’s capital.

One day the bulls wrest command and the Dow Jones leaps 500 points.

The next day bears pull off a countercoup… and retake the 500 points the bulls won the day before.

The rascals may claim an additional hundred or two before the bulls come back at them the following day.

Investors are glued to the desperate back-and-forth, like breathless spectators at a tennis match with everything on the line.

Which side wins ultimately — bull or bear?

Today we assess opposing forces… and hazard an ultimate victor.

The bears put the bulls to rout again today.

The Dow Jones plunged 497 panic-stricken points. The S&P sank 51, while the Nasdaq lost another 160.

MarketWatch reports on today’s combats:

U.S. stocks fell sharply… as investors focused on a batch of weaker-than-expected economic data out of China and Europe, sparking fresh worries about the state of the world’s second-biggest economy and prospects for global growth.

Freshly released data out of China revealed that November industrial output and retail sales underperformed expectations.

“Indeed,” says Stephen Innes, head of Asia-Pacific trading at Oanda, “investors are right to be worried about global growth as China economy continues to sputter.”

Meantime, data out this morning revealed that both German and French private sectors pulled back sharply in November.

And so the “globally synchronized growth” the professionals crowed about last year is nearly turned upon its head.

The United States economy is still growing… though trending in the incorrect direction.

GDP growth crested in this year’s second quarter at 4.2%. Third-quarter growth slipped to 3.5%, while fourth-quarter estimates converge at roughly 2.4%.

Bloomberg tells us today that excluding autos, U.S. manufacturing has stagnated two of the past three months.

Today brings further word that rating agencies have downgraded a thumping $176 billion of corporate debt this quarter — a possible portent of a credit crisis.

And we have it on reliable authority — Jeffrey Snider, head of global investment research at Alhambra Partners — that the banking system has contracted for the second consecutive quarter.

“This,” says a gulping Snider, “hasn’t happened since 2009.”

Meantime, the marauding bears think they have victory within sight…

The S&P peaked in late September. It presently trades more than 10% below that summit — meaning it is in official correction.

Thus the index is halfway to full bear market territory, defined commonly as a 20% fall from its most recent heights.

And as notes financial journalist Mark Hulbert:

“The stock market’s late-September peak looks disturbingly like the beginning of a bear market.”

Here he stands behind data from the widely respected Ned Davis Research.

They reveal the stock market’s third-quarter showing tracks closely with a pattern matching bull market tops for nearly 50 years.

Hulbert:

[Ned Davis] calculated the average return of the S&P 500’s 10 sectors over the last three months of each prior bull market top (back to the early 1970s). This enables them to periodically look at how that historical ranking compares with how the sectors are actually performing.

For example…

Davis Research reveals the health care sector performed second best of the 10 S&P sectors (on average) the three months prior to previous bull market tops.

“Ominously,” notes Hulbert, health care ranked first the three months prior to the Sep. 30 market top.

Meantime, the utilities sector typically ranks last of the 10 sectors for the final three months of previous bull markets.

Its current ranking: eighth.

How do these sector rankings inform us of our place in the market cycle?

Once again, Hulbert:

One reason is that the stock market may be anticipating an imminent economic slowdown, in the process favoring more defensive sectors such as health care… Another reason is that interest rates typically start rising in the latter stages of a bull market, and higher rates have a disproportionately negative impact on “financials” and “utilities.”

Interest rates may rise once again next week, when the “Open Market” Committee of the Federal Reserve huddles at Washington.

Market odds of another rate hike presently stand at 76% — in favor.

This, as the global liquidity stream is going dry.

The Federal Reserve chiefly accounts for the drought… but the other central banks are falling in behind it.

And so the tide swings in favor of the bears after a nearly unbroken string of defeats stretching a decade.

So today we wonder:

How much fight do the bulls have left?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post Who’s in Charge of Wall Street? appeared first on Daily Reckoning.

The 7 Stages of a Financial Bubble

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

“Is there a market 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.

Look at the market right now. The Dow is about 3,000 points off its October high. And it could get a lot worse.

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.

There you have the seven stages of a financial bubble. And we could be nearing the end. But let me say it again: I love 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.

Based on recent action, it might be time to get greedy.

Regards,

Robert Kiyosaki
for The Daily Reckoning

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