Harry S. Dent Jr.'s Blog, page 111
May 13, 2016
Our National Debt Will Grow to $31 Trillion by 2023
It just seems like human nature to ruin a good thing.
As much as I am a strong proponent of free market capitalism, and against complex regulations and central planning, I understand government’s role in all this.
Capitalism and democracy teamed up in the late 1700s to form the big bang in economics, or what I call “When Harry met Sally.”
They’re opposites that balance each other – capitalism rewards people for their contributions, and democracy ensures that greed doesn’t take over.
We took Adam Smith’s theory of the “invisible hand,” limited government and laissez faire politics… and combined it with Alexander Hamilton’s doctrine of a stronger government to enhance capitalism. We invested in common infrastructures, established a central bank with uniform monetary policies, and implemented financial and legal systems – things free market capitalism can’t do alone.
That’s why, together, these two ideologies complement each other – so long as they don’t get in each other’s way.
But, John Maynard Keynes screwed that up when he came out with the worst economic theory in history during the Great Depression.
His brilliant idea was that the government should fight downturns with deficit spending to offset declines in the private sector. He literally said that if it would help, the government should pay people to dig ditches and then fill them back up!
How uneconomic is that?
I’ve realized by studying history that it helps to get government involved when it comes to nurturing a developing country. They need infrastructure and export industries as such countries are rapidly urbanizing.
It works – if government doesn’t overdo it!
China’s government has overdone it, while India’s needs to step it up. With their rapid and unsustainable urbanization, China has a GDP per capita (adjusted for purchasing power) of $12,116, while India’s is $5,591. Malaysia, one of the wealthiest emerging countries with $26,145 GDP per capita and 75% urbanization, is an example of a government that got it more right.
It was inevitable that government’s role would grow as we urbanized and grew more wealthy. Urban areas are exponentially more complex to manage than rural areas.
The trick is to have government do the right things and to do them efficiently. Otherwise, you over-plan and over-regulate and end up like China, or Russia – or increasingly, the U.S. and Europe.
But that’s exactly what Keynes did. He thought governments should actively smooth out natural economic cycles through deficit spending.
His theories got mainstream acceptance in the 1970s when Nixon said: “We’re all Keynesians now.” And ever since, this theory has been abused and is now destroying the golden goose of free market capitalism and democracy.
This chart shows the story on the fiscal side:
We started running nonstop deficits in the 1970s to offset that long recessionary economy in the summer season from 1969 – 1982.
That was largely justified and inevitable. But then the real crime began.
We ran larger and larger deficits even in the greatest boom in history, when we should have run huge surpluses with burgeoning government revenues and falling social costs.
Basically, we got hooked on the fiscal stimulus drug.
By the time the great boom started in 1983, we had government debt of $443 billion and a deficit that year of $208 billion.
We added $1.8 trillion to the debt into 1990… another $2.5 trillion into 2000… $4.3 trillion more into 2008… and another $8.1 trillion between 2009 and 2015. Today, it’s a grand total of $19.2 trillion!
Greenspan made it worse by adding monetary stimulus, lowering interest rates every time we had a stock crash or recession – from 1987 forward.
And since huge deficits and low rates weren’t enough, Bernanke came along and added QE – straight injections of “crack” – much more powerful than merely setting short-term interest rates to zero. Now, long-term Treasury interest rates are at zero or negative when adjusted for three-year average inflation rates. The next step looks like helicopter money – sending checks in the mail to households!
Do you get the progression here? Does this sound like a drug addict?
Liberal economists like Paul Krugman think we should be running bigger deficits and more QE – on top of already runaway deficits and monetary policy.
This is insanity!
Here’s the reality just ahead. My indicators say we are going to see the worst of this winter deflationary season from 2016 into 2022 (2023 for deficits on a one-year lag). If we added $8.1 trillion to the debt in the eight years between 2009 and 2015, I see at least 50% more in the next eight years, or $12 trillion minimum by 2023.
That will bring us to at least $31 trillion in national debt…
And GDP will be at least 10% lower, say $16 trillion. That’s a government debt ratio of nearly 200%!
How do you like them apples?
More on this from the preeminent government budget expert and former U.S. Comptroller General, David Walker, as our keynote speaker at the Irrational Economics Summit, October 20 -22 in Palm Beach…
Walker will share his vision for the future of America, and how he thinks we can set ourselves on a course for financial responsibility, and save ourselves from ruin… a real insider’s take… see you there.
Harry
May 12, 2016
A World Without Wires: Cell Phone Technology Takes the Next Step
Unless you’re a tech historian, the name Marty Cooper won’t jog your memory, even though you probably use a spin-off of his invention several times a day.
Marty invented the first handheld cell phone back in 1973, and is credited as the pioneer behind our current wireless telecommunications industry.
Well, mostly wireless…
At a youthful 87, Marty is still around today, and says his original invention has one glaring flaw.
You have to keep charging its battery.
Of course, that’s something we’ve all grown accustomed to, but it’s a real annoyance having to keep a charger nearby at all times. And with more phones in the world than people, it can be tough even finding an outlet. Have you been to an airport recently?
Well, in the next several years, charging your wireless devices with a cord will become as obsolete as the “Please be kind, rewind” reminders we all came to hate with VHS movie rentals.
And thank goodness – because between smart phones, fitness trackers, wireless medical devices, and now enhanced virtual reality glasses, we’re all turning into a mobile RadioShack!
Looking ahead at this disruptive technology, companies are approaching the cordless charging problem from all angles.
A company called Wi-Charge believes that a laser should beam signals from ceiling fixtures to cell phones. Another called U-Beam is investing in technology that would charge your phone using sound waves!
But the most compelling technology coming to market, at least according to Cooper who sits on their board, comes from a company called Energous Corp. (Nasdaq: WATT).
Energous has designed several prototypes that actually charge your wireless device using the very radio frequencies that allow it to communicate. Any of your wireless gadgets will be able to pull energy directly out of the air and charge instantly in your pocket, purse, secret government location – wherever. If it can receive a radio signal, it can charge.
Maybe you’ve seen the wireless charging mats on sale already, but these are more novelty items since they require you to leave your phone with a device that’s still plugged into the wall. But these wireless devices Energous is working on will take us one step closer to that future without wires we’re all waiting for.
But where there’s innovation, there’s a two-ton, bureaucratic, regulatory body (with fangs) standing in the way.
Indeed, one of the biggest hurdles to making the technology work are the regulatory approvals from the Federal Communications Commission (FCC).
The FCC is charged with ensuring all radio, television, wire, satellite, and cable communications are properly managed and do not interfere with one another.
If you remember how long it took to officially allow mobile communication devices to be used during plane flight take-off and landings, I need to say no more. Expect radio spectrum approvals for using this technology to be extremely slow.
One alternative is using smart phone case technology to extend the battery life of your device.
Nikola labs made a big splash at TechCrunch Disrupt this year when they revealed a smart phone case that harnesses and recycles unused energy your phone creates, simply by searching for cell towers and Wi-Fi routers.
With regular use, this earth-loving smart case can extend your battery life by about a third. However, get the case close enough to a Wi-Fi router and your smart phone will start charging in a similar manner to the Energous technology.
Bottom line: we are on the cusp of new charging technology that will allow us to finally cut those pesky cords.
If we look back at truly disruptive technology, it’s the subtle technology advances that no one was paying attention to that changed how we live our lives.
SMS text messaging was built into phone networks in the 1980s as a back-up method to communicate using the phones control channel. With smart phones, the technology pivoted and is now globally worth over $100 billion.
And finally, there’s battery life itself. We wouldn’t even need to worry about plugging these devices in so much if they’d just stay charged a little longer.
Rodney will be talking about the latest development in energy storage in June’s Boom & Bust, out later this month. Several companies are starting to maneuver into this space. Overall, it’s a trend that could result in another $625 billion in economic growth by 2025, not to mention make technology more efficient! So look out for that in the coming weeks.
Until then, stay plugged in!
Ben Benoy
Editor, BioTech Intel Trader
May 11, 2016
“Brexit” Could Take a Wrecking Ball to Your Portfolio
On June 23, voters in the United Kingdom will decide in a referendum whether to remain in the European Union. And while it looks like the “stay” camp might edge out the “leave” camp, with six weeks until the vote, the polls show a statistical dead heat.
If I were a betting man, I’d wager on cooler heads prevailing and the Brits opting to stay put. That’s what the actual betting markets are pricing in, anyway.
But what if they don’t?
After all, a year ago no one would have bet on Donald Trump becoming the presumptive nominee of the Republican Party, or on Bernie Sanders giving Hillary Clinton a run for her money.
But these days, anything’s possible. Voters are angry and agitating for change. And for what it’s worth, Trump, who’s never shy about offering an opinion, recently encouraged British voters to leave the EU. Not that British voters necessarily care, mind you. But it goes to show that anti-establishment voices around the world share similar sentiments.
And yet, this British exit – or “Brexit,” as they’re calling it – is hardly getting any press on this side of the Atlantic.
It should. It’s a big deal. A really big deal.
Even if the UK were to split from the EU, London would probably maintain its role as the financial capital of Europe. None of the other financial centers are big enough or sophisticated enough to carry the torch.
But beyond that, it gets murky.
If the British leave the EU, then Scotland will probably vote to leave the United Kingdom…
That, in turn, would embolden Catalonia and possibly the Basque Country to finally pull the trigger and secede from Spain…
And once you have a euro-denominated country like that go through a political breakup, yields on European government bonds would probably spike all across the continent.
It would basically be a continuation of the Greek sovereign debt crisis… maybe on a larger scale.
At that point, would Germany be willing to prop up the Eurozone? Or would German voters shout nein, walk away, and allow the entire Eurozone experiment to go up in flames?
Again… no one really knows. Which is precisely what makes all of this so disturbing.
But even if the UK votes to stay put – the very fact that they’re having a referendum is proof enough of how fragile Europe is right now.
Ever since the sovereign debt crisis started six years ago, European integration has been going into reverse. Banks have essentially been walled in under the control of national regulators. There’s been plenty of talk of restricting migration between EU member countries. And overall, the European world is getting smaller rather than larger.
On our side of the Atlantic, it’s not too different. The presumptive nominees of both political parties are two of the most polarizing political figures of the past 30 years. There is literal talk of building a wall… as well as figurative walls by renegotiating trade deals.
The overall trend across the entire Western world is one of disengagement and retrenchment.
That’s bad for economic growth… and by proxy, the stock market.
Let’s get back to the case at hand, the potential Brexit on June 23. Again, I see cooler heads prevailing. But if they don’t, we should expect the following to happen:
The U.S. dollar should soar in value relative to the euro and the pound. Markets hate uncertainty, so they will stick with the perceived stability of the dollar.
U.S. bond yields (and probably German yields) will likely hit new all-time lows. I would expect British and most other European bond yields to spike, bringing on another 2010-style debt crisis.
Energy prices will sell off again, putting pressure on the U.S. banking system and junk bond market.
Stock markets, particularly in Europe, will take a major hit. Investors will sell first and ask questions later.
There are so many moving parts. You wouldn’t necessarily expect an Italian bank to go under because another EU member decided to drop out, or for oil prices to drop.
And yet, that’s how complicated the world has gotten. Everything is intermingled. And sometimes all it takes is one event to set everything in motion.
Again, I don’t expect the Brits to take that jump into the wild unknown. But as we get closer to June 23, you’ll want to keep an eye on this. Because if there is any single thing that could take a wrecking ball to your portfolio, this is it.
Charles Sizemore
Editor, Dent 401K Advisor
May 10, 2016
Aramco: Don’t Take the Bait!
Saudi Arabia has a problem. The country’s wealth is completely dependent on oil revenue, which state officials use to bribe the population into submission.
But with the price of oil hovering in the mid-$40s, after falling from over $100 in recent years, the Saudis have been dipping into their national piggy bank to make good on their social promises.
They need oil prices over $60 to balance their budget, but that might not be in the cards anytime soon. Looking at a future full of American fracking, country officials decided they needed to change course.
So, they came up with a plan.
To break the country’s dependence on oil, it will invest in other technologies and industries, retraining its working population and setting the country on a course for the 21st century.
To finance this transition, the government will sell shares in its national oil company to the public. Most likely, it’ll list shares on the national stock exchange and another in a major hub like New York or London.
When shares of the oil company, Aramco, hit the market, it could cause a feeding frenzy.
A word of advice – don’t take a bite.
Aramco could be valued between $2 trillion and $3 trillion. The Saudis are talking about selling perhaps 5% of the company, which would raise between $100 billion and $150 billion. For their investment, shareholders would get no control, no visibility, no assurance that company officials would work on their behalf, and a history full of self-interested dealings that are meant to benefit Saudis and no one else.
Thanks, but no thanks.
For those not versed in the history of Middle Eastern oil exploration, ARAMCO stands for Arabian American Oil Company. I won’t bore you with all the background details, but a few milestones are noteworthy.
In 1933, Saudi Arabia sold a concession to Standard Oil allowing the company to explore for oil. It took five years, but eventually they found it, and started paying the Saudis a set fee per unit of oil produced.
During the 1940s, other oil companies joined the group, and several major oil fields were found.
Saudi Arabia decided it wasn’t getting paid enough after western energy companies started cutting deals with other countries in the area, like Iran. So, in 1950, Saudi officials persuaded Aramco to split the profits 50/50 between the western firms and the Saudi government. By “persuaded,” they threatened to nationalize the company’s assets. Some deal.
Production continued during the 1950s and 1960s. OPEC formed in 1968 as several oil-producing countries came together after geopolitical tensions bled into their oil operations. By 1973, the Saudi government was again dissatisfied with its profit-sharing. Now, they wanted ownership.
The government again “persuaded” the companies of Aramco to sell 25% to the Saudi government. The share was increased to 60% after the 1973 Israeli Middle East War, and then pushed to 100% by the mid-1970s.
Now, the Saudi government didn’t just take the company. They paid for the shares, which in 1973 terms came to about $2.7 billion. That equates to roughly $15 billion today.
Of course, at the time, the proven oil reserves in Saudi Arabia were just 93 billion. Today they have 260 billion, so Aramco should be worth a lot more.
But how much more? If the company controls three times the amount of reserves, shouldn’t today’s value be three times what they paid, or $45 billion?
Hmmm. Something doesn’t add up.
If the company is worth $2.5 trillion today as Saudi Arabia claims, then it should have been worth a third of that, adjusted lower for inflation, in 1973, given the difference in proven oil reserves. That would put the fair value back then at $155 billion. And yet the Saudis paid just $2.7 billion by threatening nationalization. That’s a heck of a negotiation strategy!
Fast forward to the present, when the country hopes to end its reliance on oil in its national economy. Granted, this will be exceptionally difficult, given that the Saudis produce little other than oil and sand.
But that’s their goal. And to do it, they want to raise money from private investors, who will end up owning part of the very oil company that the government is trying to de-emphasize.
If the Saudis aren’t successful, and oil remains by far the largest contributor to the economy, what happens to shareholders if oil prices are stuck at low levels?
Do they get anything? Dividends? Anything? I can’t see the Saudis joyfully shipping money out of the country when they are bleeding cash.
And if the Saudis are able to end their reliance on oil, then what? Will they keep investing in new technology and exploration to keep Aramco growing? Or will private investors find themselves holding onto an asset in long-term decline?
Given their history, as well as their goals, this looks like an investment that no one could love.
When it hits the market, expect share prices to move with the price of oil for a little while. But when shareholders find themselves unable to get straight answers from Aramco officials, and then see the kingdom siphon off assets for other projects, chances are these shares will be relegated to an unloved corner of the market.
Rodney
May 9, 2016
Central Bank Credibility Takes Another Hit
A few weeks ago, the Fed met and announced their policy decision with no change and no big surprise. No shocker there.
But after parsing the statement for changes from their previous statement, there were a couple items of interest.
Until this last meeting they had said that: “Global economic and financial developments continue to pose risks.” This time they removed that language entirely.
I guess they’re trying to be more “data-dependent,” instead of paying attention to what’s happening overseas…
They also mentioned that while economic activity has slowed, labor market conditions are still improving. One voting member even voted for a hike.
So just looking at the changes, you might think this means the Fed’s optimistic about hiking soon.
Maybe… but the market isn’t buying it, and bond yields reacted similarly. Besides that, I can think of at least a few reasons for not hiking…
There’s poor economic data for one (duh). But if you look down the calendar, there just isn’t really a great opportunity for them to do it, either.
A June hike would come too close to Britain’s vote on exiting the EU. Then, a September hike is just ahead of the presidential election.
Maybe they’ll aim for December, but there’s a full six months for them to turn tail and run on that too.
But let’s forget the Fed for a moment…
The real big surprise came a couple weeks ago when the Bank of Japan (BoJ) announced no change in policy, after most were expecting more stimulus.
World equity markets didn’t like that too much. They sold off sharply, and Japan’s stock index was down an eye-popping 3.61% in a day and has continued to fall!
It shouldn’t surprise anyone that Japan is finally running out of tools to stimulate. They’ve thrown everything they could at deflation and a stagnant economy for the past couple decades. Too bad none of it’s worked. Negative interest rates aren’t doing the trick either. Maybe they’re finally starting to realize this.
The European Central Bank (ECB) is also running out of options. In March they expanded their monthly bond purchases, or quantitative easing, by 20 billion euros and lowered their interest rates. There was speculation that the ECB might have done even more considering their economy is barely growing and the euro is stubbornly strong.
But what else can they do? The deposit rate in Europe is already negative. Maybe the main refinancing rate is next on the chopping block? Whatever happens, no one expects any sort of move until maybe September.
Even if central banks increase their stimulus efforts, what’s the endgame here? Will they suddenly spark the fires of inflation after years of failing to achieve this? Give me a break. All these massive amounts of bond buying, interest rate cutting and other central bank shenanigans haven’t done squat! About all central banks have done is create extreme volatility with their frequent interventions.
I can only imagine the chaos and damage that will come from all this. Kicking the can down the road, piling up more debt and devaluing currencies can only get you so far.
Dr. Lacy Hunt held a workshop on the characteristics of extremely over-indebted economies at our last Irrational Economic Summit. He offers a sobering view on how debt puts a constraint on economic activity. It’s even worse given that the debt is largely unproductive – because you’re essentially borrowing from the future, making it harder to pay later.
Dr. Hunt is sort of the outsider looking in, but Dr. Nayantara Hensel has actually had the opportunity to sit down with former Federal Reserve chair Ben Bernanke. She’s the former Chief Economist for the Navy and will also be speaking at our conference this October. She’s more of an “insider” and will have some unique insight into future Fed policy.
There aren’t too many economists we like at Dent Research, and we aim to bring the few we do like out to this conference. That said, you don’t want to miss what they have to say.
Lance Gaitan
May 6, 2016
A Yo-Yo Trick to Master Right Now
2016 might be the year of the Yo-Yo market. Up, down, up, down, up, down. It’s enough to make your head spin. And in true Yo-Yo fashion, it likely has a few tricks up its sleeve as well.
The biggest trick will be to pick your pocket!
After a nosedive, investors become too bearish and so the market rallies again. Then they’ll jump on the bandwagon and buy stocks just in time for the rally to fizzle out.
Out too early. In too late.
Given extremes in sentiment and weak demand indicators, we may be back at the point of turning down again…
As you well know, 2016 started off with a huge sell-off. While investors likely didn’t slash their wrists and jump out windows, it was the worst start to a year ever.
Then stocks turned on a dime to finish the first quarter with a lot of strength.
After a few short weeks, we’re now collectively too bullish again. Professional investors, individual investors, speculators… they’re all too optimistic about stock prices.
Actually, professional investors are among the worst when it comes to allocating to stocks at opportune times. As the market was getting smashed in the first quarter, their equity allocation dropped down to about 20% at the exact low. Now it’s up near 80% after a huge rally.
Historically, this level of stock allocation has led to 0.1% annualized returns. Lots of risk for very little reward.
Individual investors have fared a little bit better. They only upped their stock allocations by about 3% recently, with that coming out of their cash position. Currently, at 65%, the stock allocation is below what it was at the last two major tops, but only by 5%.
One of the best composite indicators is the Ned Davis Research Crowd Sentiment Poll. Currently it stands at 66.6%, which is overly optimistic. Historically, this has yielded annualized returns of just 1.9%. So again, a lot of risk for not much return. Earlier this year, sentiment bottomed at 42.8, which coincided with the market bottom.
My point is: we’ve come too far, too fast. The easy money has been made.
It’s time for this Yo-Yo to head back down and the signs are there that it’s started.
Analyzing speculators is a great way to uncover shifts in the market before they become obvious. In the past week, levered inverse funds saw their inflows increase by less than 1%. This was the lowest level since mid-February, when the market bottomed.
Investors in levered funds are just one notch below gamblers. They piled into this trade at the bottom and burned themselves bad. They’re now pulling back on trading levered inverse funds.
As these speculators cut back on their shorts recently, they increased bets into levered long funds. These funds saw an inflow of 0.3% of assets, which was the first increase since January.
So here’s a Yo-Yo trick to implement right now: do the opposite of what the masses are doing! It almost always pays.
Besides looking at individual and professional investors, analyzing what corporations are doing is also enlightening. Stock buybacks are still occurring. As I’ve discussed before, they’re a major driver of the market performance over the last seven years. But, this year they’re down over one third from a year ago.
As buybacks trail off, not only does that impact the demand for stocks in a negative way but it also could impact earnings. Companies have used buybacks to prop up earnings per share in the face of weakening revenue and maxed out profit margins.
This could be a set-up for earnings disappointments as 2016 wears on. Muted earnings and excessive optimism mean that the downside is much more significant than investors realize today.
Be on the lookout!
Don’t let the Yo-Yo knock your feet out from under you on its way down.
John Del Vecchio
Editor, Forensic Investor
May 5, 2016
Sell in May… or So They Say
Monday marked the first trading day of May.
With that flip of the calendar page, investors are wondering whether or not they should follow the old adage: “Sell in May and go away.”
Like so many investing adages, there’s an element of truth to this one… and many caveats. Ultimately, your decision to follow or ignore this market-timing strategy depends on how you invest and protect capital.
Buy-and-hold investors might do well to heed the advice.
But for other investors, particularly those of us who employ active and statistically sound strategies, the “sell in May” advice isn’t all that helpful. In fact, following the advice blindly would actually undermine my strategy’s long-term return potential.
Let me walk you through a few research studies that show why there’s nothing to fear (“but fear itself,” perhaps) in May.
We’ll start with a look at this chart:
May 4, 2016
Quit Living So Long!
The mainstream media has your number. You make too much money, you don’t pay enough in taxes, and you get too many tax deductions.
Now there’s a new charge to add to the list – you live too long.
We all know that Social Security favors low-income workers. As the graph illustrates, for those at the low end of the average wage scale, Social Security replaces a little more than 50% of their income.
As career-average wages go up, the replacement rate goes down. The numbers slide all the way to the top of the earnings scale, where those earning the maximum amount taxed for Social Security have about 26% of their income replaced by the social safety net.
So the people at the top get half of the replacement rate of those at the bottom:
May 3, 2016
When It Comes to Investing, Stick with What You Know
A Peruvian wedding and the recent Berkshire Hathaway annual meeting have a lot in common.
That might not sound immediately obvious, but it’s true.
I’ve been in Peru for the past week. By lucky coincidence, the national Peruvian Paso horse competition (which my father-in-law won this year) and the wedding of my son’s godmother were both in Lima. So it was a solid week of obligatory celebrating (it’s been tough).
The thing is, it wasn’t your typical wedding.
The bride was a Peruvian Catholic of Jewish ancestry and the groom an Indian American Hindu who spent most of his formative years in Oman.
The guest list looked a little something like a model UN meeting. And they somehow managed to make all of that gel in a single ceremony.
Somehow… somewhere… they managed to find a Spanish-speaking Hindu priest in Lima to perform the Hindu ritual in a mixture of Sanskrit and Spanish. And they also managed to find a bilingual Catholic priest to perform the Christian wedding in English and Spanish. The only thing missing was the bilingual English/Yiddish rabbi.
It was a delightful melding of mismatched everythings. Which brings me back to how it was just like the recent
