Harry S. Dent Jr.'s Blog, page 116

When It Comes to Retail, the Future Looks Ominous

Lately, retail has been on my mind. When I am traveling or out shopping with my wife (I don’t buy anything but she sure does!) I love to people-watch and see what they’re up to. I see a lot of people walking around the mall but not too many arms filled with shopping bags. Maybe they’re there for the exercise.

Last week I talked about how Wal-Mart is a

Here’s an Idea – Let’s Make the Banks Responsible

It’s no secret I can’t stand most banks, particularly Bank of America. The institution is doing its best to get rid of any customer service that ever existed (fewer tellers, pushing clients to online services, etc.) while airing sappy ads about how much they care. Care about what? Their bonuses? Certainly not their customers.

But even with my long-standing grudge against B of A, I’m not joining the chorus calling for greatly increased regulation or busting them up along with the other big banks.

I’ve got a better idea. Hold them responsible for their actions.

In 2008 the financial world was in a tailspin. JPMorgan, Bank of America, Citigroup, and Wells Fargo were desperate for capital as short-term lending dried up and the value of their assets fell. The Fed and U.S. Treasury came to their rescue, providing much-needed loans and seemingly unlimited support. The thinking at the time was that such banks were “too big to fail,” meaning that if they went under, they could damage the entire financial system. They had to be saved.

This happened right after the lending giants Fannie Mae and Freddie Mac were taken over – and bailed out – by the U.S. government.

Both are instances of privatized profits and socialized losses. The years of gains earned by these banks and the mortgage companies were paid out in dividends to shareholders as well as salaries and bonuses to staff. When everything went south, shareholders took a hit in their share price and some staff were fired or saw their bonuses cut, but the pain was short-lived. Bank share prices rebounded some, and banks again payed seven figures to some of the same people who oversaw the crisis.

Over at Fannie and Freddie, the story is a little different, and provides a cautionary tale.

These companies were placed in conservatorship by the U.S. Treasury and given $187 billion in loans. In return, the Treasury demanded certain payment terms, which it eventually scrapped and said simply: “Give us all your profits.” Since the crisis, Fannie and Freddie have paid the U.S. Treasury $240 billion.

Not one penny of it reduced their $187 billion loan, which they still owe. Under the current arrangement, the mortgage companies can NEVER repay their loans, because all net income must be paid to the U.S. Treasury.

There is no doubt that U.S. taxpayers were burned by allowing these companies to book private profits in the years before the crisis, and then required to bail them out with public funds in the time of need.

But now we’re getting burned again because the government is using the profits from these companies as slush fund cash to pay for ongoing operations, saving itself from the hard work of balancing the U.S. budget. Now we have socialized losses and socialized profits.

Anyone who thinks the government can efficiently run for-profit businesses without succumbing to political pressures, raise your hand… and check your sanity.

A case in point, Fannie Mae recently unveiled a new initiative to promote lending, a 3% down payment loan. That sounds suspiciously like some of the mortgage offerings that created the last crisis. I’ve no doubt this will end badly.

As for the big banks, all of our teeth-gnashing and Congressional hearings brought about precious little change. These institutions controlled 44% of deposits in 2006, and now have 51%. They grew from $5.18 trillion in assets to $8.01 trillion. How’s that for taming the Leviathan?

The problem is that, because of their Systemically Important Financial Institution (SIFI) status, which is Congressional-speak for too-big-to-fail, everyone believes that when the next crisis hits, these banks will be supported by taxpayer funds.

And it could get worse. Instead of pushing the banks farther away, the government could pull them closer, where they end up in the weird world of Fannie Mae and Freddie Mac.

A better solution for all of these companies would be to draw clear lines of responsibility, outlining what will happen when capital requirements aren’t met. If more capital couldn’t be raised, junior bondholders would be wiped out, then senior bondholders. After that, depositors would start taking haircuts.

If these steps were illustrated, depositors would quickly realize that there isn’t much of a bondholder cushion between them and a haircut.

And it’s not individual depositors that would be alarmed. While some people do hold more than the insured maximum of $250,000 in their account, it’s mostly companies that have uninsured funds.

Hopefully the real possibility of a deposit haircut would motivate these large bank clients to demand better risk management from bankers. They might even take their business to smaller banks with less complicated balance sheets.

Unfortunately, as long as there is a perceived safety net from public sources for the largest banks, then the largest customers will use them, perpetuating the system, and putting our tax dollars at risk.

Rodney

Follow me on Twitter @RJHSDent

Crypto War: We Need a Better Solution

If you’re a red-blooded American you probably know the 2nd Amendment, right to bear arms argument all too well.

One side argues owning a fire-arm is a constitutionally given right which makes America a safer place. Meanwhile, the other side argues for tighter restrictions due to gun-related violence.

My personal favorite is: “Strong gun control means you can hit your target!”

No matter what side you’re on, the issue is beyond complicated. It requires a measured and well-thought-out approach to balance between personal and federal protection.

Now imagine throwing the gun out of the debate, and think about another device most Americans carry around with them and use every day…

Smart phones.

The argument in this case is now eerily similar. After the most recent terrorist attacks, the U.S. Government isn’t saying you can’t have this device. However, they are pushing for policy that would control key features on it. Specifically, the 10-letter technology that’s at the center of this whole freedom and privacy debate: encryption.

Now if you’ve watched any of the political news conferences lately, you probably heard the politicians throwing around the encryption buzzword like it’s the spawn of Dr. Evil. From what they’re saying, you’d think it’s only used for despicable purposes and terrorist plots.

But just like guns, encryption technology is primarily used for security and protection. Smart phones store and communicate an incredible amount of personal information such as financial, health, and location data.

It’s now more important than ever to keep this information away from criminals who want to leverage your own personal information against you.

Without strong encryption, hackers and criminals can access your personal information, steal it, and even use it without your knowledge or permission. If you know anyone who has had their credit card or identity stolen, you know exactly what I am referring to.

But it gets worse. Without strong encryption, security hackers have the capability to turn on your microphone or camera without you knowing. Better not take your phone to the restroom ever again!

After the tragic San Bernardino shootings, the FBI asked Apple (Nasdaq: AAPL) to not only assist with breaking into the terrorist’s iPhone to gain crucial intelligence, but to also build a permanent “back door” into the software on iPhones to allow for government access.

Apple complied with the first request, but denied the second on the grounds that this

The Importance of Market Psychology

On Game Day, a young athlete can usually benefit by having a positive influence on the sidelines, be it a coach or a parent. I’ve seen this first-hand for many years.

When talking to a young athlete about a sub-par performance, a coach or parent can try and turn things around by yelling or demeaning. That usually doesn’t work.

On the other hand, the coach can stress the positives, and maybe past accomplishments, while addressing current missteps and a plan of action.

My daughter is now 21 and still plays fast-pitch softball in college. She definitely responds better to a positive message than a negative one. I know personally how this works since I coached (and watched others coach) her and her two brothers.

The markets, however, don’t care how they’re treated. Investors are always looking to buy or sell based on what they think will develop in the future. But there’s no doubt the markets respond to positive and negative messaging. Some call it market psychology, but it’s really investor psychology.

Instead of looking at

Three Principles to Double Your Money in Two Years

I was in an awkward position back in November 2012.

We were warning readers about the growing imbalances and cracks

The Affluent Market Is Finally Fading… and Fast

About 30 years ago, I was able to predict the U.S. would see a major generational spending peak in 2007, all from my demographic indicator, the Generational Spending Wave.

On a 46-year lag from the time they were born, that’s when the peak number of baby boomers would peak in spending for the average household.

After that, they would slow in spending, ultimately sending the economy over a “demographic cliff.” Remember, 70% of the economy relies on consumer spending! When it slows, everything falls with it.

This first demographic cliff happened right on cue, and it helped carry the world into a financial crisis that we’ve still never really recovered from despite unprecedented government stimulus.

But now, there is a second demographic cliff that I’ve been forecasting which appears to be happening in spades, and globally – not just in the U.S. and China.

While the peak number of baby boomers peaked in spending in 2007, the more affluent – the top 10% to 20% – didn’t peak until late last year, 2015. In other words, up until now their spending has still been driving the economy. Going forward, that will be less and less the case.

This group peaked eight years later simply because they tend to go to school longer and have kids later. They peak on about a 54-year lag, not 46 like the peak number of boomers.

Don’t underestimate this group. We’re talking about the spending of the top 10% to 20% during a period of the highest income and wealth inequality since 1928 to 1929. They account for around 50% of income and spending. That gives them much more weight. And that means that as they cut back their spending as they’re already starting to, it’ll carve out a hole in the economy that’ll really kick off this global crash.

Look at the S&P Global Luxury Index, which gives you an indication as to how this group is spending:

This index peaked in mid-2015 and has fallen 26% as of February 11. It’s down much more than the broad S&P 500, down about 15% at worst recently from its high in May 2015.

This is not a coincidence. This is basically an index for affluent spending, and it peaked in the same year this group peaked.

The index includes iconic brans like Nike, Este Lauder, Mercedes, Moet Vuitton, BMW, Carnival Cruises and VF Corporation. But there are many leading brands that have also seen their stocks collapse in recent months or years.

Nordstrom, a brand we all know, is down 36% since last March…

Ralph Lauren has crashed 46% since last January…

Sotheby’s is off 48% since June…

Tiffany & Co. is down 32% since August…

Williams-Sonoma is off 44%, also since August…

And Louis Vuitton, 24% since October…

Clearly, the affluent sector is falling! They have benefited the most from zero interest rate policies and this artificial bubble and “recovery,” but it’s now starting to break down.

This is another monumental change in demographic trends and the final death knell for the economy. If the Fed thought it could fight the demographic decline and debt crisis since 2007 with endless QE and stimulus, I want to see them fight this trend. There’s no way. Game over!

And guess who will lose the most wealth in this next, larger crash? The very group I’m talking about. The top 0.1%, 1%, 10%, and 20%, because they own almost all of the financial assets that have been favored in this bubble period with endless QE and zero interest rates. Worse, it’ll be years before they see another great boom – not until late 2022-forward. And it won’t be like the one we saw from 1983 to 2000.

Now is the time to protect your wealth on this final, desperate rally before stocks see a more serious crash in the year to follow.

Harry

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The Market’s Hidden Opportunity to Buy a Dollar for 90 Cents

If I offered to pay you a crisp $1 bill for the 90 cents you have jingling in your pocket… well, you’d probably think I was either crazy or a scamster.

Or maybe both.

But if, after inspecting the dollar bill, you determined the deal to be legit, you’d jump on it in a heartbeat.

In fact, you might even run to the bank and take out your entire life savings in dimes in the hopes that I’d give you a dollar for every 90 cents you could throw together. Why wouldn’t you? It’s free money.

I’m not going to give you a dollar for 90 cents… so, sorry if I got your hopes up. But I will point out several pockets of the market today where these kinds of deals (or better) are on offer.

But first, we need a little background. If you have a company that’s trading at 90 cents to the dollar, that means it’s trading at a discount to its book value. “Book value” or “net asset value (NAV)” is the value of a company’s assets once all debts are settled. Think of it as the liquidation value of the company.

Now, for most companies, book value is a pretty meaningless number. If you’re a service or information company like

A Hard Look at the Economy’s Health

The markets were down sharply earlier today thanks in part to oil. A barrel of oil today costs around $32. That’s up slightly from the mid-$20s last month, but still an economic death trap.

Everyone knows energy prices have taken a beating. Oil stocks are down over 60% since the summer of 2014 when the Market Vectors Oil Services ETF (NYSE: OIH) topped out at $58. Now it sits at just under $23. And gas hasn’t been this cheap in seven years.

That’s a pretty nasty bear market.

Conventional wisdom is that low energy prices are great for American consumers and help provide a boost to the economy through increased spending.

The problem with conventional wisdom in the markets is that when you do what others are doing, you get what others get: sub-par returns.

Of course, low energy prices don’t affect just Americans, but consumers all over the globe. They should all be stimulating the economy with their spare change. But there’s one clue that Joe Six Pack is feeling economic pain despite low energy prices.

That clue is the performance of shares of Wal-Mart (NYSE: WMT).

In my opinion, Wal-Mart is one of the greatest indicators of the economy’s health because nearly everyone shops there.

Over 260 million people shop at Wal-Mart each week. Eight percent of every U.S. dollar is spent at Wal-Mart and 90% of Americans live within 15 miles of a store.

If you watch CNBC or read Wall Street economic reports, they often have sophisticated models to predict economic strength. They look the part with their slick backed hair and fancy suits. What’s not to believe?

The problem is that these economists live in a bubble. They’re famous for collectively never having predicted a recession before it happened. But rather than rely on job numbers and inflation reports that are heavily manipulated by the government, like most economists do, it’s far easier to look at the performance of a retailing behemoth and project economic strength (or the lack of it).

Back in October, Wal-Mart reported a dud of a quarter and shocked Wall Street with reduced guidance for the coming fiscal year. It was a troubling sign for the economy.

The toll on the stock price was remarkable. Shares of Wal-Mart had the largest single day plunge in three decades. The shocking news came amid news that earnings could drop as much as 12%. Investors had expected the bottom line to grow in the coming year.

Then last week, Wal-Mart missed both its estimates for revenue and earnings per share. Earnings per share were down a staggering 7.5%.

The company has also been dogged by a strong U.S. dollar. As I have mentioned in the past, this is

The Problem With Free Trade: There Are Always Losers

If you join a poker game and can’t identify the “mark,” then chances are, you’re it! The “mark” is the person at the game who is less experienced, or perhaps is given to reckless betting. By including this player in the game, everyone else has an opportunity to walk away a winner.

But don’t lose sight of the bigger picture. Not everyone is a winner, and typically someone ends up the big loser!

The same principle works when countries get together for free or open trade. Everyone talks about how great it will be, how much their economies will grow, about efficiencies and new opportunities. But they almost never talk about the people who will lose.

Believe me, there are always losers.

Adam Smith’s famous book The Wealth of Nations laid out the case for free trade. If one nation is really good at making shoes, and another is really good at making cloth, then when they exchange goods the shoemakers can focus on what they do well and so can the weavers.

In this exchange, the cobbler nation shouldn’t make cloth and the weaving nation shouldn’t make shoes. By specializing on what they do best, each nation can better hone its skills while enjoying a bigger market for its product as well as have access to better goods from abroad. Everyone wins, right?

Wrong. Everyone benefits, but some still lose.

Specialization is at the heart of free trade. Companies that are really good at something should do more of that, using their abilities and resources to be as productive as possible. If they don’t have to work on a bunch of other things at which they lack expertise, then companies can boost their efficiency.

At the same time, consumers in each country benefit from greater selection and, presumably, lower prices. Ideally specialization allows companies and countries to lower costs of production, thereby offering clients better goods and better deals.

So countries win, companies win, and consumers win. But then there is the pesky case of displaced workers.

The weavers in the country of cobblers are now out of a job, as are the cobblers in the country of weavers. In Adam Smith’s version of the story, this is no problem. Obviously the newly-unemployed workers will be quickly hired by companies in their home country that suddenly have an abundance of orders to fill from overseas.

Maybe that was true in Adam Smith’s day.

It’s possible that in the late 1700s, before the industrial revolution created the lands of plenty, such specialization by country created tremendous new selling opportunities for both countries so worker displacement wasn’t a problem. But in the 21st century, we’re not so lucky.

From 1990 to 2013, China’s share of exported manufactured goods on the planet grew from 2.3% to 18.8%. In some areas of American life, Chinese market penetration neared 100%. And if it wasn’t just the Chinese, it was a combination of foreign manufacturers.

Chances are, the computer screen you’re looking at right now was made in Taiwan or South Korea. Even the ones that say “Made in U.S.A.” typically have parts made overseas and just undergo final “assembly” here.

There’s no doubt that by opening their doors to labor and becoming the low-cost workforce on the planet the Chinese government dramatically improved the lives of its citizens.

Since 1990, the average real income in China rose from 4% of its American counterpart to 25% today. As we paid them to make disposable consumer goods, we gained access to cheap stuff, which improved our overall standard of living.

But it came at the expense of jobs. Because of the size of the Chinese labor force and its ability to take over entire industries, giant swaths of manufacturing employment in the U.S. were obliterated. According to a study by Dorn, Autor, and Hanson, 44% of the manufacturing decline in the U.S. between 1990 and 2007 can be attributed to the rise of China. A $1,000 rise in Chinese exports in an affected industry drove down per-worker wages by $500, and government subsidies (retraining, etc.) only replaced $58.

The logic of free trade works, as long as you kept your job, and aren’t competing with a bunch of people laid off because of free trade. For them, the process of getting rehired by domestic companies that picked up a lot of work because of the deal is taking just a bit longer than expected.

The problem is that industries tend to be concentrated geographically. An entire town might work for one company in one industry. So when that industry is undercut by new imports, the effects are broad and deep in those areas, leaving little employment opportunity for the newly displaced. Rebuilding those areas can take years, if it ever happens.

Moving to a different part of the country is a solution, but anyone with a working spouse and kids knows that such a transition is exceptionally difficult.

Contrary to earlier theories that assumed workers could find new jobs quickly, now it looks like it can take over a decade. The authors estimate that we currently employ 2.4 million fewer people because of Chinese competition.

This doesn’t mean that we should not have free trade, or that we shouldn’t have specialization of labor. These arrangements allow for amazing leaps in technology and standards of living.

But we should keep in mind that just because a TV costs less doesn’t mean everyone wins. Before you can buy a cheap TV, you need to have income. That’s tough without a job.

Rodney

Follow me on Twitter @RJHSDent

Steer Clear of Big Pharma and Biotech!

Last October, I voiced my