Why Powell Might NOT Cut Rates

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The market’s been bouncing around lately, anxiously waiting to see it the Fed cuts interest rates next week. All indications now suggest that it will. The question is by how much?

Minutes from June’s Federal Open Market Committee (FOMC) meeting that were released earlier this month indicated support for a rate cut. Certain committee officials noted that as long as uncertainty still weighed on its outlook, they would be willing to cut rates.

And during his much-awaited biannual testimony before the House Financial Services Committee, Federal Reserve Chairman Jerome Powell hinted — strongly — that a rate cut was around the corner.

Powell told the committee, “It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.”

But the subsequent release of better-than-expected June employment figures complicated the matter of rate cut size and timing.

They raised the possibility that those positive jobs numbers would keep the Fed from cutting rates. After all, it doesn’t make a lot of sense to cut interest rates when the job market is so hot and unemployment is at 50-year lows.

But despite that concern, markets are still placing the odds of a rate cut of 25 basis points at 100%, with lower expectations for a 50 basis point cut.

This means a rate cut is already “baked into the cake.” However, the risk is that if Jerome Powell and the FOMC don’t cut rates next week, it could cause a sharp sell-off.

We’ll have our answer next week. But despite the overwhelming market expectations for a rate cut, I think there’s a chance the Fed won’t cut rates yet. That’s because Powell may still want to signal the Fed’s ability to act independently from White House pressure.

I realize that puts me in the extreme minority. But that’s OK, it certainly isn’t the first time.

But there’s something else going on right now that could trip up markets.

Earnings season is underway. Over the next few weeks, all of the S&P 500 companies will be rolling out their earnings figures. And more than a quarter of them will report earnings this week.

Firms from Google’s parent company, Alphabet, to Amazon, McDonald’s and Boeing are among the more than 130 companies that are reporting.

Even with a rate cut, poor corporate earnings could spell trouble for stocks. The trade war would be partly responsible. Certainly, there remains no resolution on the U.S.-China trade war front. And the trade war combined with slowing growth could amplify the effects of weak earnings.

As one article reports, “Stocks could struggle if the earnings message from corporate America focuses on the murky outlook for the economy and negative impacts from the trade wars.”

Earnings so far have been positive, but that can be misleading. That’s because second-quarter earnings expectations were kept low so that corporations could easily beat them.

Their actual earnings may not be underwhelming. But if they beat expectations, that’s all that counts.

And as I learned on Wall Street, corporations often talk down their earnings estimates in order to set a low bar. That way they can easily beat the forecast, which produces a jump in the stock price.

As Ed Keon, chief investment strategist at QMA explains:

No matter what the economic circumstances are, no matter what the backdrop is, there’s this dynamic that companies like to lowball and analysts like to give them headroom. The fact that numbers are coming in better than expected — it’s been the case for decades now.

Of the 114 companies that provided second-quarter guidance as of last week, 77% released negative forecasts, according to FactSet.

But it’s still early and there’s a long way to go.

Most industrial companies haven’t reported earnings yet. And they could reveal extensive damage from the trade war. As CFRA investment strategist Lindsey Bell says:

As we get more industrials in the next couple of weeks, I think that will create more volatility and drive the market lower in the near term… Chemicals and metals are two areas where I expect pressure.

We’ll see. But if markets do stumble, you can expect the Fed will be ready to cut rates at its meeting in September. That means more “dark money” will be coming to support markets, even if the Fed doesn’t cut rates next week.

And that’ll keep the bull market going for a while longer. One day the music will end. The imbalances in the system are just too great.

But we’re not at that point yet, and you can expect markets to rise on additional dark money injections.

Enjoy it while you can.

Below, I show you one major factor that will continue to support stocks this year. It doesn’t have to do with the trade war or earnings. What is it? Read on.

Regards,

Nomi Prins
for The Daily Reckoning

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The War of Stocks and Bonds

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Jerome Powell dangled the morsel yesterday — rate cuts are on the way.

And like Pavlov’s famously conditioned dogs, Wall Street heard the opening bell this morning… and began drooling.

The major indexes were instantly up and away.

They lost momentum after the president intimated he may take a swing at Iran for downing a U.S. drone.

“You’ll soon find out” was his response when asked if the U.S. would retaliate.

The bulls nonetheless won the day…

The Dow Jones was up 249 points at closing whistle. The S&P gained 28; the Nasdaq, 64 points.

Gold, meantime, went skyshooting $44.50 today — $44.50!

Combine the prospects of vastcentral bank easing with possible fireworks in the Persian Gulf… and you have your answer.

What about the bond market?

Stocks vs. Bonds

The bellwether 10-year Treasury slipped to 1.98% this morning… its lowest point since the 2016 election.

And so the infinitely expanding gulf between stock market and bond market widens further yet.

One vision is bright, cheery, trusting. The other is dark, dour… and morose.

One of these markets will be proven right. One will be proven wrong.

Our money is on the bond market.

We have furnished ample evidence that recession is likely on tap within three months of the next rate cut.

Here analyst Sven Henrich reinforces our deep faith in the calendar of misfortune:

Every single time the Fed cut rates when unemployment was below 4%, a recession immediately ensued & unemployment shot to 67%. Again: Every. single. time.

We remind you:

The United States unemployment rate presently stands at 3.6% — the lowest in 50 years.

“A Gorgeously Wrapped Gift Box Containing a Time Bomb”

An unemployment rate below 4% is a false prize, a sugar-coated poison… a gorgeously wrapped gift box containing a time bomb.

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

The economy was in recession by March 2001.

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

The economy was sunk in recession shortly thereafter.

The pattern stretches to the 1950s.

The proof, clear as gin… and equally as stiff:

Chart

And unemployment often bottoms nine months before recession’s onset… according to the National Bureau of Economic Research.

Meantime, it is 10 years into the present economic “expansion.” Next month will establish a record.

A Very Strange Expansion

An expanding economy is generally a time of surplus.

It is a time to store in reserves, to squirrel away acorns, to save against the rainy day — the inevitable rainy day.

These savings will see you through.

But during this economic expansion, during this season of bounty… the United States has only sunk deeper into debt.

The cupboards are empty.

Trillion-dollar annual deficits are presently in sight.

The national debt rises to $22.3 trillion — some 105% of GDP.

And interest payments on the debt alone will likely eclipse defense spending by 2025.

Come the inevitable recession, Uncle Samuel will plunge even deeper into debt.

That is, he will reach even further into the future… to rob it for our benefit today.

Deficits may double — or more.

How is the business at all sustainable?

But it’s not only a doddering old uncle going under the water…

The Corporate Debt Bomb

Corporations have loaded themselves to the gunwales with cheap debt — cheap debt coming by way of the Federal Reserve.

First-quarter nonfinancial corporate debt increased to $9.93 trillion. That is a record.

And this we learn from the Treasury Department:

Today’s nonfinancial corporate debt-to-GDP ratio is the highest since 1947… when records began.

And here we spot a straw swaying menacingly in the wind…

Fitch informs us nearly $10 billion of high-yield corporate bonds have already defaulted in the second quarter — double the amount of first-quarter defaults.

Warns Troy Gayeski, co-chief investment officer at SkyBridge Capital:

“Whatever the cause [of the next recession] may be, the acute point of pain will be in corporate credit.”

Depends on it.

Finally we come to the fabulously and grotesquely indebted American consumer…

Consumers Drowning in Debt

Total U.S. consumer debt notched $14 trillion in the first quarter — exceeding the roughly $13 trillion before the financial crisis.

Twenty-three percent of Americans claim that life’s essentials — food, rent, utilities — constitute the bulk of their credit card purchases.

And 60% of Americans hold less than $1,000 in savings.

How will they keep up come the next recession? How will they meet their debts?

They already groan under the load — and the economy is still expanding.

Meantime, the cost of a middle-class lifestyle has surged 30% over the past two decades.

But Pew Research reports the average American worker wields no more purchasing power today… than he did 40 years ago.

That is, he has jogged in place 40 years.

Utter and Complete Failure

The past 10 years of central bank intervention on a grand and heroic scale have worked little benefit.

The coming recession will bring yet more intervention— on an even grander and more heroic scale.

But why should we expect it to yield any difference whatsoever?

For the overall view, we turn to Mr. Sven Henrich:

The grand central bank experiment of the last 10 years has ended in utter and complete failure. The games of cheap money and constant intervention that have brought you record global debt to the tune of $250 trillion and record wealth inequality are about to embark on a new round… The new global rate-cutting cycle begins anew before the last one ever ended. Brace yourselves, as no one, absolutely no one, can know how this will turn out…

We are witnessing a historic unraveling here. Everything every central banker has uttered last year was completely wrong. Every projection they made over the last 10 years has been wrong… Why place confidence in people who are staring at the ruins of the policies they unleashed on the world and are about to unleash again?…

All the distortions of 10 years of cheap money, debt, wealth inequality, zombie companies, negative debt… will all be further exacerbated by hapless and scared central bankers whose only solution to failure is to embark on the same cheap money train again. All under the banner to “extend the business cycle” at all costs. Never asking whether they should nor considering the consequences. But since they are not elected by the people and face zero consequences for failure, they don’t have to consider the collateral damage they inflict.

Unfortunately, the rest of us do…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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About Today’s Jobs Report…

This post About Today’s Jobs Report… appeared first on Daily Reckoning.

The May unemployment report came rolling from the United States Department of Labor this morning.

In the highly technical vernacular of the trade… it was a “miss.”

And not by a nose, not by a hair, not by a whisker.

Economists as a group divined 175,000 May jobs.

What was the actual number?

Seventy-five thousand — fully 100,000 beneath consensus — and the lousiest figure since February.

Each one of 77 Wall Street analysts — each one — heaved up a greater estimate.

But unlike February, they cannot foist blame upon winter weather or a government shutdown.

Thus our faith in experts staggers yet again… and fast approaches our faith in weathermen, crystal gazers, salesmen of pre-owned automobiles and congressmen of the United States.

But our faith in the lunacy of the existing financial system is infinitely confirmed…

Wall Street vs. Main Street

In a healthful and functioning order, the stock market is a plausible approximation of prevailing economic conditions.

A poor unemployment report should send panicked shudders through the stock market.

It indicates a wobbled economy. Rough business is likely ahead. And companies can expect a reduced profit.

Stocks should — in consequence — fall tumbling on the news.

But ours is not a healthful and functioning order. It is rather an Alice in Wonderland order.

Up is down. Down is up. Good news is bad news.

And bad news is good news…

Bad news for Main Street is good news for Wall Street, that is.

Wall Street thrives on Main Street’s bad news as doctors thrive on fractured legs… as dentists thrive on toothaches… as embalmers thrive on murders.

And this morning’s jobs report constitutes good news for Wall Street.

It merely forms additional evidence the Federal Reserve will be slashing interest rates soon.

And low interest rates are the helium that lifted stocks to such gaudy and obscene heights lo these many years.

Stocks Soar on Today’s Weak Jobs Report

The Dow Jones was so heavily floored by this morning’s jobs report it went up 300 points by 11 a.m.

The other major indexes were similarly flabbergasted.

The S&P was up 35 points and the Nasdaq up 130 by the same 11 a.m.

All three indexes composed themselves somewhat by day’s end.

The Dow Jones ended the day 263 points in green territory. The S&P gained 30 points, while the Nasdaq added 126.

Yet as we documented Wednesday, the economy is going backward… and recessionary warnings flash in all directions.

Meantime, all reasonable estimates place second-quarter GDP growth under 2%.

But because the Federal Reserve promises yet additional levitating gases, the stock market has record heights once again in view.

“The Disconnect Between the Economy and Stocks is at Record Highs”

Thus the gentlemen of Zero Hedge declare, “The disconnect between the economy and stocks is at record highs.”

JJ Kinahan — chief market strategist at TD Ameritrade — here affirms the “bad news is good news” theory:

The market’s got a conundrum here. That’s a bad report. Just on the report itself, I think people would want to sell the market. However, the fact that it really makes the case for a rate cut, I think is why you’re seeing the market hang in there.

Affirms Mike Loewengart — vice president of investment strategy at E-Trade:

This is the type of [jobs report] the doves will really take to as it supports the argument for cutting rates beyond politics or trade issues…

Luke Tilley, chief economist at Wilmington Trust, adds:

I think that this is a true slowdown in hiring right now… The market signals are obviously screaming for the Fed to reduce rates.

Wall Street has Jerome Powell by the ear.

When Wall Street screams for lower interest rates, lower interest rates it will have.

Odds of Rate Cuts Approach 100%

The market presently gives 84% odds that the Federal Reserve will cut rates at least 25 basis points by July. By September those odds increase to 95%.

By January, they rise to 99%… with the heaviest betting on two rate cuts.

Investors further expect at least three rate cuts by next June.

But as we have detailed at length… you can expect recession within three months of the inevitable rate cut — whenever it may fall.

Yes, the next destination is recession.

The route may twist, the route may meander, the route may even temporarily turn back on itself.

But it terminates in recession nonetheless.

The “New Normal”

The No. 2 man at the Federal Reserve would nonetheless have us put away all talk of recession.

Mr. John Williams insists diminished growth is merely the “new normal”:

I know this talk of slowing growth is causing uncertainty, some hand-wringing and even fear of recession. But slower growth shouldn’t necessarily come as a surprise. Instead, it’s the “new normal” we should expect.

But with the highest respect to Mr. Williams… why shouldn’t we expect more?

The United States government borrowed in excess of $10 trillion over the prior decade.

$10 trillion is plenty handsome. Yet that $10 trillion of debt yielded only $3 trillion of real GDP.

Or to switch the figures some, the nation’s debt increases roughly $100 billion per month.

But GDP only increases some $40 billion per month.

We have gotten plenty of buck, that is. But not half so much bang to go with it.

The nation’s debt-to-GDP ratio already exceeds 100% — its highest since WWII.

The standard formula says deficits should decline during economic expansions. Come the inevitable recession, the government then has a full war chest to throw at it.

But a decade into the current expansion… the Treasury is depleted.

Trillion-dollar deficits extend to the horizon.

And the debt-to-GDP ratio is projected at 115% within three years.

Meantime, the Federal Reserve expects long-term GDP growth of 1.9%.

It is a bleak calculus — growing debt twinned with sagging growth.

The Mills of the Gods 

As we have argued previously, time equalizes as nothing else.

Scales balance, that which goes up comes down, that which goes down comes up…

The mighty fall, mountains crumble, the meek inherit the Earth.

We suspect strongly that stock market and economy will meet again on fair ground.

We further suspect it is stock market that will fall to the level of economy. Not the other way.

The mills of the gods may grind slowly, as Greek philosopher Sextus Empiricus noted.

But as he warned…

They grind exceedingly fine…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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A Glimpse of the Future

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Any simpleton can recognize an unfolding calamity…

The two trains about to collide, the twister racing for the schoolhouse, the betrayed lover with a finger on the trigger.

But you require a wider vision to perceive the chains of disaster coming together… link by fateful link…

When a conductor gets his signals crossed, when the winds take a fatal shift, when someone takes the first bite of forbidden fruit.

Today we attempt a wider view of future calamity presently taking shape.

But first to a future calamity in its own right — the stock market.

Global Growth Drags on Stocks

Once again, the global economy throws a darkened shadow over Wall Street.

We learn today that Chinese industrial profits have fallen 14% year over year — their largest fall since 2011.

Meantime, European Central Bank (ECB) President Mario Draghi has drawn a dark sketch of the eurozone.

Mr. Draghi cited “weakness in world trade” and a “weakening growth picture.”

The ECB recently downgraded its 2019 eurozone GDP forecast from 1.7% to 1.1%.

The Dow Jones gave back 32 points on the day. The S&P lost 13, the Nasdaq 48.

By way of explanation Ed Yardeni, president and chief investment strategist at Yardeni Research:

There’s lots of angst about global economic growth. That’s understandable because it has been slowing significantly since early 2018. Furthermore, we can all observe that ultra-easy monetary and debt-financed fiscal policies aren’t as stimulative as policymakers have been hoping.

Yes, Mr. Yardeni. We can all observe that ultra-easy monetary and debt-financed fiscal policies aren’t as stimulative as policymakers have been hoping.

Except, perhaps, for the policymakers themselves.

Failure is only indication that they need to double, triple or quadruple existing ultra-easy monetary and debt-financed fiscal policies.

As said Wittgenstein:

“Nothing is so difficult as not deceiving one’s self.”

But we lift our gaze from the roiling present… and face the distant horizon.

A Vision of Coming Recession 

What do we spot?

Unsurprisingly, a scene of coming recession…

The present expansion is the second longest in United States history.

If the economy can peg along until July, it will be crowned the longest expansion in United States history.

But the signs of age are creeping in, like rust on a chassis…

Growth has been trending wrong two consecutive quarters — and going on three.

Even the eternally optimistic Atlanta wing of the Federal Reserve projects first-quarter GDP to expand at 1.5%.

JPMorgan Chase seers project the same 1.5% — but even that is subject to “downside risk.”

The reasons are close at hand…

Housing prices are the softest in four years, manufacturing plumbs 21-month lows, retail stores are closing at alarming rates (5,279 year to date), the American consumer languishes under record levels of debt.

And the yield curve has inverted — a recession indicator of supreme accuracy.

Looking out beyond these pristine shores, we also find the global economy wobbling on its axis.

As suggested above, China and Europe all go on unsteady legs. Japan is similarly afflicted.

Meantime, the Federal Reserve has just executed perhaps its most dramatic retreat in its history.

It has essentially guaranteed no rate hikes on the year. As recently as December it had penciled in two.

Would it throw up the sponge if it were confident in the future?

But the Federal Reserve has conceded defeat to a superior and determined foe — the stock market.

Jerome Powell ran his white flag up the pole in late December, after the market raged against his promises of additional tightening.

We are forced to conclude that the Federal Reserve cannot lift interest rates much above the present 2.50%… or restore its balance sheet to levels approaching pre-2008 levels.

That is, the economy cannot withstand interest rates that are still historically low. And the stock market will roar in protest if rates rise only slightly.

The “Real” Interest Rate

But the “real” interest rate — the nominal rate minus the inflation rate — is even lower than face value suggests.

Thus we find the real fed funds rate not 2.50%, but as low as 0.25%.

By way of comparison…

The real fed funds rate scaled 2.75% when the Federal Reserve’s last tightening cycle concluded in 2006.

And 4% when the previous cycle ended in 2000.

But sticking to the nominal rate, history argues convincingly that rates between 4% and 5% are required to beat back recession.

Only with that much “dry powder” can the Federal Reserve cut enough to lift the economy from its wallows.

But when recession does besiege us — this year, next year or the year following — the Federal Reserve will scarcely be at half-strength.

Imagine a one-armed gladiator battling in the arena… or a flyweight taking on the heavyweight champion of the world.

And so the Federal Reserve is in an awful bind…

It must raise rates to build its steam against the next recession. But it cannot raise rates above present levels without bringing the Furies crashing down upon it.

A conundrum to ponder of a blue day.

But we now return our binoculars to the purple horizon…

Recession in Fall 2020 Could Sink Trump

The next presidential election falls in November 2020 — 1.5 years from today.

Given the present drift, the economy may well be sunk in recession by that time.

Recessions are notoriously poor portents for incumbent presidents.

Since the Civil War the economy was in recession eight occasions during presidential election season.

These years were 1876, 1884, 1896, 1920, 1932, 1960, 1980… and 2008.

In all eight instances — all eight — the opposition party was voted in.

If the economy plunges into recession by next fall, could the sitting president defy the odds?

It would not be the first time.

But every man’s luck has its limits. Eventually the gods plot against him.

And recall the Federal Reserve will likely enter the next recession with barely a half barrel of steam.

Recession will roll over it like a thundering locomotive over a rat.

And the cries will go out:

“Capitalism has failed yet again!”… “This is all Donald Trump’s fault!”… “It is time to reclaim the economy for the people!”

At this point our vision of the future begins.

Part II tomorrow…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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The Lyft IPO is Rigged!

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THE GAME IS RIGGED!

Consider this alert your fair warning.

This week, you’re going to see A LOT of publicity dedicated to hot technology companies like Lyft, Uber, Pinterest and Airbnb.

That’s because all of these companies (and a few more) are on deck to go public through an initial public offering (IPO). This is typically how new stocks are added to the market and how individual investors like you and me can invest in new companies.

However, today I’m warning you to ignore the hype.

That’s because when it comes to IPO investing, Main Street investors like you are ALWAYS at a disadvantage…

Here’s What You Need to Know About the IPO Market

Let me start off by saying that I have a lot of experience with IPOs.

Back when I was at the hedge fund, it was my responsibility to handle all of the IPO business that our firm took part in.

I would go to the road shows, grab lunch with the executives of the new companies, place calls to the brokers in charge of the deals, and I would literally call in favors that were owed to our hedge fund to ensure the best treatment possible when it came to the hottest deals.

So when I say this market is rigged, I know exactly what I’m talking about.

Here’s how the typical process works…

A company decides that they want to sell shares to the public for two primary reasons:

Reason #1 To Go Public — The company wants to sell shares to raise capital so they can open new stores, hire more workers, or become a stronger business.

Reason #2 To Go Public — Company insiders — AKA founders and private equity owners who got in before you or I ever had a chance to invest — want to sell part of their position at a top-dollar price to lock in a big profit.

Unfortunately, the latter accounts for a large portion of these transactions. And unsuspecting individual investors who buy these shares are usually the ones handing them their profits.

That’s because the men and women on Wall Street — with their millions of dollars in research capabilities and their endless connections — know exactly which IPOs are strong businesses looking to grow and which are full of insiders looking to cash in on their investment.

You on the other hand probably do not have these insights, which puts you at a serious disadvantage when it comes to making money from these exciting transactions.

But that doesn’t mean all hope to cash in on IPOs is lost!

Here’s How YOU Can Profit on the Market’s Hottest New Stocks

To profit from the market’s hot new stocks — like the Lyft IPO that is getting so much attention right now — you need to know how Wall Street approaches these events.

Most Wall Street firms get their allocations of new stock at one price from the broker, for example $35 per share. Once the stock starts trading in the market, the successful ones move sharply higher — maybe starting to trade at $45 or more.

Therefore, these institutions have a BIG incentive to sell these shares and lock in a profit. And that’s what they do!

So you don’t want to be buying in the first few days or weeks after a successful IPO prices. Because in other words, the big institutional investors are SELLING.

But wait a few weeks and after the dust settles, then these same institutions start building their real positions.

This happens after they get a chance to do all of their research, see how the stock is trading, and check in on the managers and see if anything has changed since the company went public.

If these institutions still like the stock after all of this research, they start buying stocks over time. That’s when you want to jump in with them and ride the stock higher — not when the stock is hyped up on its first day of trading.

Bottom line: the whole IPO game is rigged in favor of the big guys on Wall Street.

However, with the right playbook, you can still make money alongside these investors over time. You just need to be patient.

Consider this your fair warning.

Now let’s get to the other most important stories to start your week…

5 “Must Knows” for Monday, March 25th

Apple vs. Cable — Today at 1PM Eastern, Apple Inc. is holding a “special event” to announce new service-related products at its headquarters in Cupertino, California. Early reports indicate that two services expected to be announced include a streaming video service and a premium subscription to its News app. Today’s event is just another example of Apple creating a “moat” around its business, keeping competitors at bay.

New Boeing Details Emerge — New details emerge daily about the status of the Boeing 737 MAX, which not only impacts Boeing’s stock price, but also the prices of airlines globally. The two most recent reports state that Boeing rushed development of the aircraft in order to beat Airbus’ rival plane to market, and that Boeing is currently testing software changes to the plane to avoid future accidents. Stick with The Daily Edge as we continue tracking this story.

Earnings on Deck — There are plenty of exciting earnings reports scheduled to be released this week. On Tuesday, Cronos Group, Carnival, McCormick and KB Homes reports earnings.

On Wednesday, Paychex, Lennar, Five Below, Lululemon Athletica and PVH report earnings.

On Thursday, Accenture and Restoration Hardware report earnings.

And wrapping up the week on Friday, Blackberry and CarMax report earnings.

U.S. Economic Check Up — On Thursday, the Commerce Department is scheduled to publish its most recent estimate of gross domestic product (GDP) growth — a growth measure of the overall economy.

According to the WSJ, the first estimate showed the economy grew at a 2.6% annualized rate in the fourth quarter from the previous three months. But new services-sector data showed Americans’ spending in this area slowed sharply in the fourth quarter, suggesting the economy lost more momentum at the end of 2018 than previously believed. Economists polled by the Journal expect that growth was a slower 2.4% pace.

Trump Proven Innocent — We try to stay away from politics here at The Daily Edge. After all, our job is to make you money, no matter what side you lean towards. However, the headline-grabbing Robert Mueller investigation concluded this weekend and found insufficient evidence that President Trump obstructed Justice. This is good news for anyone with money invested in the stock market right now, as turmoil in the White House certainly wouldn’t be good for investor confidence.

Have a great week!

Here’s to growing and protecting your wealth!

Zach Scheidt

Zach Scheidt
Editor, The Daily Edge
TwitterFacebook ❘ Email

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Expect the Buyback Wave to Continue This Year

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A crucial theme from last year is continuing into this year — stock buybacks. Last year was a banner year for companies buying back their own shares. A month into 2019, it appears that Wall Street is set to continue that trend.

Last year, U.S. companies announced a whopping $1.1 trillion worth of buyback plans. Armed with extra cash from favorable corporate tax policy enacted in 2017, they enthusiastically bought back their own shares.

But as of mid-December, only about $800 billion of those buybacks had actually occurred. That means there could be another $300 billion of the total 2018 target still waiting to hit the market.

In fact, Wall Street is already gearing up for another banner buyback year. In a recent report, J.P. Morgan strategist Dubravko Lakos-Bujas wrote, “It’s expected that S&P 500 companies will execute some $800 billion in buybacks… in 2019.”

The Wall Street strategist also explained that the quality of 2018 buybacks were high. He revealed that companies were using their cash, rather than borrowed money, to fund buybacks. Using cash toward buybacks is expensive less than using debt.

But why did the wave of buybacks slow down late last year?

The first reason is that companies involved had already purchased stock at a very rapid rate through last September. That was one major reason we saw the market peak around that time, and in fact, hit new records.

The second was that despite trade war fears and uncertainty, companies felt confident enough to go ahead with their buybacks initially. That’s why we saw market players largely shrug off warning signs through the first three quarters of 2018.

But sentiment shifted dramatically during the last quarter of the year, culminating in essentially a bear market by late December. And more reports around the world began to point to slowing economic growth ahead.

A key factor cited for this slowdown was the impact of prolonged trade wars, which could curb real economic activity and create more uncertainty. In turn, growing volatility would keep businesses from planning expansions, or using the cash originally set aside for buybacks.

A third reason for the drop off in buybacks late last year was a record amount of public corporate and consumer debt that had to be repaid or at least serviced regularly. This overhang of debt was weighing on growth expectations. That debt load would become even more expensive if the Fed kept up with its forecasted rate hike activity in December and throughout 2019.

Some analysts even warned that the Fed might go ahead with another four rate hikes this year. That triggered fears on Wall Street that the central bank stimulus game could truly be over.

The reason for the concern is simple: The higher the interest rates, the more expensive it is to borrow and repay existing debt. For more highly leveraged corporations and emerging market countries, this would be an even greater threat. A higher dollar, resulting from more Fed tightening, could cause other currencies to depreciate against the dollar. That would make it harder to repay debt taken out in dollars.

Finally, there was heightened tension in the financial markets due to political uncertainty. With U.S. election results ensuring added battles between Congress (with Democrats taking the majority in the House of Representatives) and the White House, doubt set in over the functionality of the U.S. government going forward.

Those reservations were justified. The government shutdown that kicked off 2019 had a lot to do with shifts in the political balance in Washington.

Geopolitical tensions also rose at the end of 2018, including Brexit in the United Kingdom, street revolts in France, potential recession fears in Italy and growing unrest in South America.

All these factors combined ensured that markets were extremely volatile during the last quarter of 2018, and why it was the worst one for the markets since the Great Depression. It was not conducive to buybacks. Buybacks are supposed to raise the stock price. But strong market headwinds could have largely canceled their effects.

The prudent approach for companies facing such a negative environment was to wait out the problems until the new year.

But Jerome Powell subsequently gave into Wall Street and took a much more dovish position on both rate hikes and balance sheet reductions. That means the coast is clear again to resume the buybacks.

Back in December, some major players announced plans for 2019 buybacks. These include Boeing, which announced an $18 billion repurchase program. It also includes tech giant Facebook, which plans to buy back $9 billion of its own shares, in addition to an existing $15 billion share repurchase program started in 2017.

Also in on the buyback wave is Johnson & Johnson, which announced a $5 billion stock buyback. Others include Lowe’s and Pfizer, which both announced a $10 billion stock buyback program.

These plans are now much more likely to go forward.

Furthermore, many large corporations like Microsoft, Procter & Gamble, Home Depot and Walmart didn’t even announce buybacks in 2018.

They could well announce them for 2019. Companies that did announce big buybacks last year, like Apple, could also engage in more, adding a potential $100 billion share repurchases this year to match 2018.

Another indicator for a sizeable 2019 buyback wave is that stock prices are lower now than they were going into the fourth quarter of 2018. That means companies can buy back their shares at cheaper prices. They could buy at a discount, in other words, or at least what they hope will be a discount.

My old Wall Street firm, Goldman Sachs, has already forecast $940 billion worth of buybacks for 2019. They previously had predicted over a trillion dollars’ worth of buybacks for 2018. The number of buybacks for 2018 even exceeded their predictions.

By mid-January, of the S&P 500 companies that reported their fourth-quarter earnings, nearly 70% of them have exceeded Wall Street’s profit expectations. It’s a favorable environment for buybacks.

Yet, it may still take some time for companies to move forward with this year’s buybacks. That’s because we are still in the “black-out” period that the Securities and Exchange Commission (SEC) has created.

The period covers the time just before and after companies post earnings results. The sell-off in October coincided with the third quarter earnings season’s “blackout period.” The combination of negative environmental factors plus fewer buybacks drove markets even lower.

Now, once earnings season and the current blackout period is over, Wall Street will be unleashed to buy large blocks of stock for their major corporate clients.

If the Federal Reserve truly holds back on its former interest rate and quantitative tightening plans, as it seems likely to do, expect central bank stimulus to continue to fuel markets.

Of course, buybacks do not come without negative implications. That’s because companies are not using their cash for expansion or to pay workers more, which would generate more buying power in the overall economy. But in the short run at least, they tend to raise the stock price.

Even if Wall Street comes up against headwinds of volatility, slowing economic growth, political strife and trade wars, they can now expect the Fed and other central banks to have their backs.

Buybacks could become a very powerful force once again this year, and keep the ball rolling a while longer.

Regards,

Nomi Prins

The post Expect the Buyback Wave to Continue This Year appeared first on Daily Reckoning.

Three Concerns Hanging Over the Davos Elite

This post Three Concerns Hanging Over the Davos Elite appeared first on Daily Reckoning.

This week, the global elite descended private jets to their version of winter ski-camp – the lifestyles of the rich and powerful version.  The World Economic Forum’s (WEF) five-day annual networking extravaganza kicked off in the upscale ski resort town of Davos, Switzerland.

Every year, the powers-that-be join the WEF, select a theme, uniting some 3000 participants ranging from public office holders to private company executives to the few organizations that truly do help fix the world that they mess up.  This year’s theme is “Globalization 4.0”, or the digital revolution. The idea being, the potential tech take-over of jobs, and what wealthier countries are doing to lesser developed ones in the process.

While the topic might be focused on the future, the present is just as troubling, if not more so, than the future.   Such is the disconnect between real people and corporations.  That’s what the estimated 600,000 Swiss Franc membership to be a part of the WEF constellation gets you as a CEO at the Davos table.

Government leaders like German Chancellor Angela Merkel, Brazil’s president, Jair Bolsonaro and Chinese Vice President, Wang Qishan are in attendance this week. Business leaders like Microsoft co-founder Bill Gates and JPMorgan Chase CEO, Jamie Dimon will also take part in the festivities.

Yet, even though the various leaders will likely promote their achievements, what’s lurking behind the pristine snowcapped Alps, is a dark foreboding of a less secure world. Nearly every major forecast from around the world is projecting an economic slowdown. As one Bloomberg article reports, “companies are the most bearish since 2016 as economic data falls short of expectations and political risks mount amid an international trade war, U.S. government shutdown and Brexit.”

The list of non-attendees includes U.S. President Donald Trump, UK Prime Minister Theresa May and French President, Emmanuel Macron. They are too busy dealing with complex political problems in their own government institutions and domestic home fronts to make the trek.

Below is a breakdown of the three flashpoints that the Davos crowd should be watching in 2019:

Economic Growth Will Slow

Signs of slowing global economic growth are increasing. We’re seeing that in both smaller emerging market countries and larger, more complex ones. Weaker-than-anticipated data from the U.S., China, Japan and Europe are stoking worries about the worldwide outlook for 2019.

Many mainstream outlets are beginning to understand the turmoil ahead. Goldman Sachs, my old firm, is predicting an economic slowdown in the U.S. And the International Monetary Fund (IMF) has revised downward its 2019 U.S. growth prediction to 2.5% from 2.7% from 2018. It believes that the U.S. will be negatively impacted by the economic slowdowns of American trade partners and that the 2020 slowdown could be even “sharper” as a result.

The IMF also points to pressure from ongoing trade tensions between the U.S. and China and growing dysfunction between the U.S. and other major trading partners, such as Europe.

Because the world’s economies have become increasingly interdependent, problems in one economy can have widespread consequences. We learned this once before: the collapse of U.S.-based investment bank, Lehman Brothers, triggered a greater international banking crisis in 2008. That sort of connectivity has only grown. The reality is that we may now face even greater threats than forecast so far, which could lead to another financial or credit crisis.

It is likely that China could be ground zero for a global economic slowdown. Recent data out of China indicates that much global GDP and trade activity that should normally be in the first quarter (Q1) of 2019 was pulled forward into Q4 2018 to “beat” the tariff increase.

It’s likely that the same phenomenon could happen in the U.S. If this trend does snowball, you should expect to see rapidly deteriorating economic numbers arriving in the months ahead.

Debt Burdens Will Worsen

No matter how you slice it, public, corporate and individual debt levels around the world are at historical extremes. Household debt figures from the New York Federal Reserve noted that U.S. household debt (which includes mortgage debt, auto debt and credit card debt) was hovering at around $13.5 trillion. That debt has risen for 17 straight quarters.

What is different this time is that current levels are higher than just before the 2008 financial crisis hit.

In addition, global debt reached $247 trillion in the first quarter of 2018. By mid-year, the global debt-to-GDP ratio had exceeded 318%. That means every dollar of growth cost more than three dollars of debt to produce.

After a decade of low interest rates, courtesy of the Fed and other central banks, the total value of non-financial global debt, both public and private, rose by 60% to hit a record high of $182 trillion.

In addition, the quality of that debt has continued to deteriorate. That sets the scene for a riskier environment. Over on Wall Street they are already disguising debt by stuffing smaller riskier, or “leveraged” loans into more complex securities. It’s the same disastrous formula that was applied in the 2008 subprime crisis.

Now, landmark institutions like Moody’s Investors Service and S&P Global are finally sounding the alarm on these leveraged loans and the Collateralized Loan Obligations (CLOs) that Wall Street is creating from them.

CLO issuance in the U.S. has risen by more than 60% since 2016. Unfortunately, it should come as no surprise that Wall Street is now proposing even looser standards on these risky securities. The idea is that the biggest banks on Wall Street can actively repackage risky leveraged loans into dodgy securities while the music is still playing.

If rates do rise, or economic growth deteriorates, so will these loans and the CLOs that contain them, potentially causing a new credit crisis this year. If the music stops, (or investors no longer want to buy the CLOs that Wall Street is selling) look out below.

Corporate Earnings Will Be Lower

With earnings season now underway, we can expect a lot of gaming of results in contrast to earlier reports and projections. What I learned from my time on Wall Street is that this is a standard dance that happens between financial analysts and corporations.

What you should know is that companies will always want to maximize share prices. There are several ways to do that. One way is for companies to buy their own shares, which we saw happen in record numbers recently. This process was aided by the savings from the Trump corporate tax cuts, as well as the artificial stimulus that was provided by the Fed through its easy money strategy.

Another way is to reduce earnings expectations, or fake out the markets. That way, even if earnings do fall, they look better than forecast, which gives shares a pop in response. However, that pop can be followed by a fall because of the lower earnings.

The third way is to simply do well as a business. In a slowing economic environment, however, that becomes harder to do. Plus, it’s even more difficult in today’s environment of geopolitical uncertainty, as a multitude of key elections take place around the world in the coming months.

These three concerns were central in conversation in Davos. Expect global markets to be alert to the comments coming from the Swiss mountain town. Severe dips and further volatility could be ahead if any gloomy rhetoric streams from the Davos gathering.

How Will the Fed React?

Ready to help, is the answer. This month, yet another top Federal Reserve official noted that economic growth could be slowing down. That would mean the Fed should, as Powell indicated, switch from its prior fixed plan of “gradually” raising interest rates to a more “ad-hoc approach.”

Indeed, Federal Reserve Bank of New York President John Williams, used Chairman Powell’s new buzz phrase, “data dependence,” to indicate that the Fed would be watching the economy more. While he didn’t say it explicitly, it has become largely clear that the markets are determining Fed policy.

Based on my own analysis, along with high-level meetings in DC, I see growing reasons to believe the Fed will back off its hawkish policy stance. As we continue to sound the alarm, there are now a myriad of reasons including trade wars, slowing global economic conditions and market volatility.

Traders are now assigning only a 15% chance of another rate hike by June. Just three months ago, those odds were 45%.

Watch for even more market volatility with upward movements coming from increasingly dovish statements released by the Fed and other central banks. Expect added downward outcomes from state of the global economy along with geo-political pressures.

Regards,

Nomi Prins

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Volatility Holds the Key to Markets in 2019

This post Volatility Holds the Key to Markets in 2019 appeared first on Daily Reckoning.

Over the last two weeks, after making good on the four-rate interest hike of 2018, Fed Chairman, Jerome Powell, became more dovish to start 2019.

His change in tone is worth considering because of his historical stance on reducing the amount of artificial stimulus coming from the Fed. Last week, after the required five-year holding period for Fed transcripts were up, we got a glimpse into Powell’s thoughts from 2013, before he was Chairman.

Powell tried to persuade then-Chairman, Ben Bernanke, to reduce the Fed’s stimulus, even though it would lead to greater near-term market volatility. That was when the third round of the Fed’s asset-buying program (QE3) was in full swing. The Fed was purchasing an estimated $85 billion per month mix of Treasuries and mortgage-backed securities.

To indicate that the Fed wouldn’t buy bonds forever, Bernanke floated the idea of slowing down its program, or “tapering,” at some non-defined future date.

Powell, on the other hand, believed the market needed a specific “road map” of the Fed’s intentions. He said that he wasn’t “concerned about a little bit of volatility” though he was “concerned that there may be more than that here.”

Indeed, once Bernanke publicly announced the possibility of the Fed’s bond-buying program slowing down, the market tanked, in a response that became known as a “taper tantrum.” As a result, Bernanke backed off the tapering idea.

Fear of more taper tantrums kept the Fed in check after that. The Fed ultimately waited until it had raised rates sufficiently, before starting to cut the size of its balance sheet. But now Powell is the Chairman. And it seems that he is much less comfortable with volatility than he was under Bernanke, as his most recent remarks indicate.

But it certainly wouldn’t be the first time a Fed chairman has modified his views when he was in control. Alan Greenspan, for example, was a staunch advocate of the gold standard when he was younger (and as presented in Foreign Affairs). But once he was Fed head, suddenly he thought a gold standard wasn’t such a hot idea after all. Go figure.

In the case of Jerome Powell, his new sensitivity to volatility means the Fed will be watching the markets for high volatility that causes sell-offs, even if also espousing their “data driven” mentality. And that he is prepared to act should that happen by backing off the Fed’s current forecast for reducing its balance sheet.

I’ve argued before that the Fed isn’t reducing its balance sheet as aggressively as it would have you believe. And I certainly expect it to dial back even more so in light of the recent volatility.

The reason is obvious.

The main catalyst for the bull market that surfaced over the past 10 years since the financial crisis in 2008 was stimulus that was fueled by the Fed and other leading central banks. This money acted as an artificial stimulant or “drug” to financial asset prices.

The world’s leading central banks have been following the Fed’s lead in withdrawing liquidity. And even though global liquidity really began drying up late last year to a minimal degree relative to its size, it should come as no surprise that markets have threw a tantrum.

Since early October, we’ve seen a lot of price volatility, with several hundred-point daily swings in the markets becoming the norm. Powell calmed the waters with his dovish comments on January 4 and the following week as well. But make no mistake, the waters are still choppy.

Many on Wall Street expect to see more volatility ahead and are forecasting that 2019 will be rocky for the stock market. But others on Wall Street are, in direct contrast, forecasting a continued bull market.

That’s the other driver of volatility — clashing opinions and wildly divergent market forecasts. We haven’t had much volatility in recent years because nearly everyone was on the same side of the bet. That’s all changed now.

To add to the market turmoil, the federal government shutdown has now officially entered its fourth week. It is now the longest shutdown on record. But the shutdown also has real economic ramifications outside of the DC beltway.

First, in a climate where the expansion of business activity is already slowing down, the shutdown is causing economists to further lower first-quarter GDP estimates. That puts a lid on expansion and hiring plans for both psychological and actual risk reasons.

More than 800,000 federal workers have missed paychecks, which means less money to pay bills and purchase goods and services that contribute to the American economy. But that’s not the only problem, although it might seem far more important, especially to those missing paychecks.

From an information standpoint, the state of the economy is tough to predict without data produced by agencies like the Department of Commerce. For instance, farmers, already hurting from trade wars, won’t be able to get key data on figures like monthly international shipments to plan crop schedules.

Then there’s the Federal Reserve itself. Whether you think it should or not be setting interest rates at all, the Fed determines interest rates while considering factors such as market volatility, slowing economic figures and trade wars. The best way to do that is to access real data. Now, business conditions will be hard to gauge accurately if reports aren’t available due to the shutdown.

That means the shutdown will stoke volatility in the markets until an agreement is reached. And when that will be is anybody’s guess right now. No real progress has been made and there doesn’t appear to be an end in sight.

But this week, the markets will be getting new information to digest. The release of fourth-quarter earnings reports will begin with big banks. These will provide more insight into how companies performed during the year-end volatility in 2018.

The corporate earnings outlook on Wall Street is fairly negative. Companies have been managing expectations downward. Apple, for instance, chopped its forecasted revenue figures last month, citing the slowdown in China’s economic growth as a reason for less iPhone sales. Apple stock lost about 10% on the day of the announcement, taking the overall market down with it.

Analysts are now estimating fourth quarter profit growth of 14.5% for the S&P 500 companies. That’s down from the 20.1% they forecast at the start of the quarter. But that could actually be a good thing for share prices.

The lower the bar, the greater the possibility it can be exceeded. There’s more upside potential in that case, in other words. That means if earnings begin to outperform prior forecasts next week, it could very well lift the markets. This tension of negative and positives factors will foster a see-saw of a quarter in the markets mixed with volatility, so being aware and nimble will be the best strategy.

But the volatility could present a great trading opportunity. Wall Street knows that it doesn’t matter if information is positive or negative — there are still ways to profit from the right information.

Something called the Cboe Volatility Index (VIX) is widely considered a “fear gauge.” That’s because it’s supposed to reflect what swings in the S&P 500 index could be over the next month.

The VIX computes its levels based on outstanding options contracts which are supposed to indicate the price that investors, or speculators, are willing to pay for protection against their positions going bad.

Currently, the VIX should be higher than it is. It recently spiked, but then settled down much lower than what the real volatility of the S&P has been this past month.

Usually, options tend to over-price volatility. That’s because people buy options in order to place bets on the future, or to protect themselves from wild swings in share prices. The less certain they are, the more they are willing to pay for that protection.

Yet, right now, the cost of protection is cheap. That’s like your health insurance premium all of a sudden dropping just when you catch a major illness. It doesn’t quite make sense.

That means that while fourth-quarter earnings season reports are emerging, it’s a good time to take advantage of buying these cheap options. Buying them on certain companies can protect you against adverse swings in share prices due to earnings announcements. It’s a form of portfolio insurance. And again, it’s relatively cheap.

That’s one pivotal key to being a great investor — accessing information. Sure, the more insights and information you have, the more overwhelming it can seem. However, if you can stay focused, your portfolio will thank you.

Regards,

Nomi Prins
for The Daily Reckoning

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Wall Street Tumbles, I’m Not Fazed

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The Dow Jones Industrial Average fell 799 points at the beginning of this month, just one day after a truce between U.S. President Donald Trump and Chinese President Xi Jinping on their trade dispute following weekend talks in Argentina. And we’ve seen more turbulence and runoff throughout the month. Do you know why? Because investor optimism over a resolution faded.

Trump himself warned he would revert to tariffs if the two sides could not resolve their differences. “The sell-off that we have seen throughout the day is really about taking a look at the tariff conversation and realizing that nothing has been resolved and that there is still some work to do and some of the euphoria that we felt yesterday was more on the headline than on the substance,” said Delores Rubin, senior equities trader at Deutsche Bank Wealth Management in New York.

As I watched my local news the headlines indicated that the world was in crisis…maybe even coming to an end.

The 3 percent drop is miniscule when compared to the 21 percent drop of the S&P 500 back in 1987. By definition, such a small drop isn’t even classified as a true correction.

The best way to predict the future is to study the past or prognosticate. My rich dad often said, “There’s a difference between a fortune-teller and a prognosticator.” That’s why he encouraged me to take the study of history seriously.

Read the Future

Starting in the fifth grade, my development as a prognosticator began with the study of the great explorers such as Columbus, Cortez, Pizarro, Marco Polo… They traveled the world in search of gold and international trade, and I try to follow in their footsteps.

But when I started getting more interesting in money movements than Magellan, I shifted. Over the years, I’ve read some great books on economic history that have opened my mind to the world we face today. Some of the books that have altered my vision of the future are:

  • Critical Path by R. Buckminster Fuller: Not an easy book, but one of the best I’ve ever read; it changed the direction of my life. That’s no exaggeration. Even though Fuller died in 1983, his predictions are coming true to this day.
  • The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers by Robert Heilbroner: This book is essential for anyone who wants to see history through the eyes of economists. A very interesting read, even though it’s somewhat dated. It’s important to know how we got to where we are if we want to know what’s coming.
  • The Dollar Crisis: Causes, Consequences, Cures by Richard Duncan: This book is essential reading for anyone who wants to survive the next 20 years. It explains why the world is entering a global financial crisis and explains why savers are losers. You need to know about this if you have any hope of not only surviving the collapse, but profiting from it.

World-Class Prognostication

I also follow the prognostications of James Dale Davidson and Lord William Rees-Mogg. Their 1987 book, Blood in the Streets, predicted that year’s stock market crash and the bankruptcy of the savings and loan industry. When their forecast came true, millions of average investors who had followed the standard advice to “invest for the long term” lost billions of dollars. But the 1987 crash made me millions, because I followed the advice of these two prognosticators.

Their next book, The Great Reckoning: Protecting Yourself in the Coming Depression, predicted the breakup of the Soviet Union, as well as the secession and breakup of Yugoslavia and the ensuing tragedy of ethnic cleansing.

In 1997, my wife Kim and I were invited to Washington, D.C., for the launch of Davidson and Lord Rees-Mogg’s latest book, The Sovereign Individual. Many dignitaries, business leaders, and investors were there. Obviously, we had all gathered to listen to the authors’ predictions for the year 2000 and beyond. Until then, I thought I had a pretty open mind. But as we listened to their predictions, Kim and I had a tough time grasping the magnitude of what they had to say about the near future.

Predictions Come True

As the saying goes, “Your mind is like a parachute—it only works when it’s open.” Rather than object, question, and criticize—as many in the audience at that reception were doing—I simply took the book home and studied it. And the closer I studied it, the more I realized it was similar to past prognostications. As a result, between 1997 and 2000, I radically altered my thinking, my businesses, and my investment strategies.

If You’re Serious About Getting Rich, Now Is the Time

We’ve entered a period of mass-produced pessimism, when bad news is everywhere, the best time to invest is when optimists become pessimists.

Journalist Hunter S. Thompson used to say, “When the going gets weird, the weird turn pro.” That’s true in investing, too. At the height of every market boom, the weird turn into professional investors. In 2000, millions of people became professional day traders or investors in dotcom companies. Mutual funds had a record net inflow of $309 billion that year, too.

I’ve stated that it was time to sell all non-performing real estate. My market indicator? A checkout girl at the local supermarket, who handed me her real estate agent card. She was quitting her job to become a real estate professional.

Pessimism Vs. Realism

When the stock market fell 20 percent in ‘87, the United States experienced one of the biggest stock market crashes in history. The savings and loan industry was wiped out. Real estate crashed, and a federal bailout entity known as the Resolution Trust Corporation, or the RTC, was formed. The RTC took from the financially foolish and gave to the financially smart.

As we all know, things only got worse in early 2008, with the demise of Bear Stearns and the Federal Reserve stepping in to save investment bankers. In February, many of those optimistic TV (and print) reporters became pessimists—and when journalists become pessimists, the public follows. By March, mutual funds had a net outflow of $45 billion as investors fled the market.

I still believe we’re due for the mother of all market crashes, and that the U.S. economy is running on borrowed time—and I do mean borrowed. I think most baby boomers are in serious financial trouble. Inflation will also increase, causing more pain for the poor and middle class.

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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