Harry S. Dent Jr.'s Blog, page 145

The Precision Medicine Initiative Continues

China’s Real Problem Isn’t Stocks – It’s Real Estate!

I always say bubbles burst much faster than they grow. And after exploding up 159% in one year, Chinese stocks crashed 35% in three weeks.

This all happened while the Chinese economy and exports continued to fall. And two thirds of these new trading accounts belong to investors who don’t have so much as a high school degree. How crazy is that?

The Market’s Decline: Sitting at the Riskiest End of the Spectrum

Between Greece’s recent “no” vote, Puerto Rico’s egregious debt, and the meltdown in Chinese stocks, we’re finally getting a scare in the markets. And while China’s near-6% upturn today might settle few worries, the kind of interventionist tactics they’re using never work. They only make matters worse.

Only time will tell whether this recent market turmoil will turn into something much worse. Maybe it’s short-lived like the last nosedive in October 2014. But right now, owning stocks looks even riskier… and as I’ve been discussing all year, we’ve been in the riskiest end of the spectrum for awhile!

So let’s take another look at market sentiment to see if much has changed given the pullback.

I check several indicators on a regular basis. Two of my favorites are what individual investors think about the market, and what professionals think.

Collectively, both of them are terrible at allocating to equities. Terrible! So when the indicators reach extremes, I like to take particular note.

As of right now, these guys are still very bullish. Currently, 67.2% of their assets are in stocks according to the

Warning! States Nationwide Face a Funding Crisis

It used to be that when economic times got tough, people sought out public employment. The pay was less than in the private sector, but the job security was pretty good, and at the end you got a pension.

Nowadays, when including all the benefits, public sector pay is higher than what you can get in the private sector, so the jobs are that much more attractive.

Unfortunately, those jobs are harder to get today than they were in years past, and chances are they won’t come back anytime soon.

This usually isn’t the case coming out of a recession, when public employment typically grows faster than the private sector. When the economy turns down, people depend more on public services. That creates even more demand for what governments provide, and requires more workers to meet those needs.

In fact, this is exactly what has occurred since the 1950s… until now.

The Rockefeller Institute studies the financial aspects of state and local government.

According to their research, public employment six years after the end of a recession was always higher – and sometimes much higher – than when the recession started, going back to 1957.

The years of the recessions they reviewed, and the employment change six years later, are as follows.

The latest downturn is an outlier when it comes to public employment. But I doubt it’s an anomaly. It’s much more likely a harbinger of what lies ahead.

The problem isn’t that states want to offer less service. Our population has grown between 6% and 8% in each of these time frames. There’s plenty more people to serve.

The problem is that they can’t afford it. More specifically, state budgets are getting overwhelmed with Medicaid costs.

Medicaid expenses increased by 28.7% between 2008 and 2013. To put that in context, education spending moved up just 1.7%… expenditures for police, highways, and natural resources was actually down 5.8%… and administrative spending was down 7.7%. Overall, state expenditures were up just 3.7%.

On the revenue side, state tax revenue is just 5% above where it was before the financial crisis. If it were following prior recessions, it would be more like 12% to 20%.

Some of this is due to stagnant wages. When constituents don’t earn a lot more, the only way to increase tax revenue is to raise the tax rate. And while unpopular, it’s exactly what’s happened in California and a few other states.

At the same time, muted consumer spending has also held back sales tax revenue. After previous recessions, personal consumption increased between 20% and 30%. But this time, it’s only up

12%.

This situation will only intensify in the years ahead as the boomers get older and eventually retire.

As they progress through their empty nester years, they’ll likely keep a lid on their spending as they try to sock away more assets for retirement. That lack of spending is the same constraint that’s held back consumption since the financial crisis, which, again, affects sales tax revenue.

But Medicaid and lack of consumer spending aside, there’s still another issue – pensions.

From 2008 to 2013, state pension contributions increased $6.7 billion – a 17% jump.

It gets worse when you consider that as the boomers retire, they’ll rightfully demand their pension payments. So as state’s pension liabilities grow, they’ll have to make larger contributions to their pension funds, leaving even fewer funds for other services.

Keep in mind that states regularly fail to make their required pension contributions. As the problem grows, they’ll just push more of the liability down the road, requiring even larger contributions in the future.

The upshot is that our state governments are slashing headcount as they try to make ends meet with only modestly-growing revenues, even though the claims on their resources keep growing.

But at some point states won’t be able to cut their employment roll to make ends meet. Rising Medicaid and pension costs won’t decline anytime soon, and the funding issue is only going to get worse. That means they’ll have to find other ways to plug their budget gaps.

It might take time, but eventually states will use the same tactic as California – a “temporary” tax hike that somehow becomes permanent.

Rodney

Follow me on Twitter @RJHSDent

China Down Another 6%!? Time to Get Defensive

It’s time to get defensive, folks.

Actually, several weeks ago was the right time to get defensive. That is, before the turmoil in Greece and China reared its ugly head and punished long-only investors.

Stock markets are down sharply over the last two weeks. China’s market has fallen 30%, and even after a number of last-ditch efforts to prop up shares prices, it’s still dropping –

U.S. Immigration Is NOT Rising, Despite What Commentators Say!

I was on

The Most Important Question When It Comes to Greece

The Greek people decided that the austerity, tax hikes, 25% unemployment and overall economic misery only benefits their creditors. They voted to not accept the terms offered last week by their European creditors. So now what?

We will know a lot more after finance ministers in the euro zone meet today and whether or not the European Central Bank (ECB) will provide emergency funds to Greek banks that have been closed for the last week.

The ball seems to be in Europe’s court right now. Will the ECB provide emergency funds to allow Greek banks to re-open? Will creditors – and more importantly, the Germans – agree to a massive write-down? Will Greece leave the euro zone and the euro altogether? When you answer one question, more come up.

The most important question is whether or not a write-down will happen. If so, other weaker members such as Italy, Spain, and Portugal could demand the same. If the ECB plays hardball and Greek banks remain shuttered, that could signal Europe’s willingness to let Greece exit the euro altogether and suffer the consequences.

The “no” vote may have caught some by surprise. But so far, the markets haven’t overreacted.

Stocks traded lower in Europe on Monday and opened lower here in the States. Treasury bond prices moved higher with yields lower as money flowed to the safety of high-quality bonds. But for the most part, Greece’s vote hasn’t had much effect on them.

For now, investors seem content that the Fed will hold off on raising rates and perhaps that the ECB will come to terms with Greece.

Long-term bond rates have been bouncing within the month long range of about 3.05% to 3.25%. If the Greek situation gets messier, we could see another flight of capital to the safety of U.S. Treasury bonds and a break below 3.0%.

Lance Gaitan

Editor, Dent Digest Trader

China’s Desperately Fighting Its Stock Market From Crashing

Feeling panic in the air, stock market officials called on one of their own to turn the tide.

They gave him a pocket full of cash and a directive – buy until stocks trade higher.

He dutifully stepped onto the floor and began purchasing blocks of blue chip companies at above-market prices. Market participants quickly fell in line, buying up shares and pushing up prices.

This is not a recap of events in China. This is what happened in the U.S. in early October, 1929.

As losses mounted, the board of the New York Stock Exchange sent their Vice President, Richard Whitney, onto the floor to buy blocks of well-known companies. The strategy stopped the Panic of 1907, and they hoped it would work again.

It did… for a little while.

Within two weeks the markets would suffer a devastating rout, on what became known as Black Tuesday. The selling would continue on and off for more than two years, until the Dow Jones had fallen more than 80% when it reached bottom in 1932.

The Chinese seem to be taking a page from this playbook, but with a twist that makes it even riskier.

As the Chinese property markets slowed in 2014, investors and speculators turned their attention from condos to stocks. Over the course of a year they pushed China’s main stock index, the Shanghai, up more than 150%.

For months the papers were full of stories of small-time investors jumping into the markets to make a buck. Many of them took out loans to purchase shares.

Under those circumstances, it was only a matter of time before the market imploded.

The Shanghai peaked in early June at 5,178, and then fell dramatically over the next three weeks. By the first week of July, the index was off almost 30% – losing over $2.4 trillion.

Fortunately, the loss was softened a bit because the government had recently changed regulations to keep margin loans outstanding, even as share prices declined. Since investors haven’t been required to meet margin calls by putting up more collateral or selling their shares at a loss, the selling has been orderly so far.

But they didn’t stop there.

In addition to interest rate cuts and lowered reserve requirements, the government also pumped money directly into brokerage firms for the express purpose of making even more margin loans.

At the same time, just as with the stock exchange and Richard Whitney in the 1920s, China’s own government tried to force prices higher by purchasing shares in large companies.

After plummeting 30%, these efforts sent the Shanghai up 2.4%, but then it turned lower again.

Clearly, China is desperate.

Its government needs the markets to hold and go higher. It can’t afford to see its emerging consumer class hit with huge loan losses. If they lose their equity value and owe their margin loans, then untold numbers of investors could be wiped out.

With slowing exports and falling construction, the Chinese have staked much of their future on domestic consumer spending. If mom-and-pop investors carry margin debt for stocks that have plummeted in value, they won’t be able to buy more stuff and drive up the economy.

This might explain why the Chinese have taken their efforts to yet another level.

Not only has the government funneled money to brokerage firms specifically to lend to investors so they can buy more stock, but they’ve also loosened the rules on what type of assets investors can pledge as collateral. Now, the Chinese can pledge their homes when they want to borrow money to make investments.

With the stroke of a pen, Chinese officials have taken the jagged remnants of one asset bubble – stocks – and stitched them to yet another asset bubble – housing.

This goes way beyond funneling money to brokerage firms to lend to investors. If investors pledge their homes and then use the money to buy stock, then any market losses could lead to the selling of shares followed by the liquidation of real estate!

In other words, both stocks and real estate could tank!

If only the economic experiments stopped there. The Chinese government is also buying up thousands of empty homes to sell to the nation’s poorest households. The idea is that this adrenaline will give the property market, and the economy, a good kick. But it completely ignores the effect of aggravating an already existing housing bubble.

At last check, China held $3.73 trillion in foreign currency reserves. The country is well-capitalized, so a stock market crash and selloff in real estate won’t send the nation into bankruptcy or default. But it will hurt when these assets start tumbling.

And the pain won’t stop at the borders.

China is the 800-lb. gorilla in the Pacific Rim. When the country feels pain, all of its smaller neighbors – Japan, South Korea, Australia – share in the discomfort.

As the Middle Kingdom goes through the process of finding a bottom in its capital markets, and potentially a retrenchment in property values, investors should think carefully before they invest anywhere in the region.

Rodney

Follow me on Twitter @RJHSDent

Greece and China: A Climactic End in Sight

Heading into last week, I said the global market was suffering from schizophrenia – unable to resolve the disconnect between a relatively strong U.S. stock market and a slew of volatile global risk factors.

Now it seems global markets are having a full blown psychotic break.

Over the weekend, Greece voted “no” to the latest bailout proposal, leaving the country’s future in limbo. Now everyone is speculating on the odds that Greece will leave the euro. The country has already defaulted on its debt to the IMF, and it now faces a $3.9 billion payment to the European Central Bank on July 20. If it fails to pay – and it can’t without a deal in place – it’s game over for the Greek banking system. The only thing keeping them afloat right now is a steady stream of ECB emergency funds.

The country’s finance minister has resigned in an effort to wipe the slate clean and start over with fresh negotiations with Greece’s creditors. But it’s hard to see Germany suddenly having a change of heart here, and with every passing hour Greece’s banks get bled a little drier as Greek savers take out whatever funds they can and stuff them under the mattresses.

At this point though, everything’s still up in the air in Greece.

Paralysis Paralyzed: Artificial Neurons Could End Brain Disorders

Scientists in Sweden have engineered and built the world’s first fully functioning artificial brain cell, better known as a neuron.

Neurons are difficult to engineer because they communicate with one another through a complex array of chemical signals commonly called neurotransmitters.

In order to pull off this feat, the scientists pulled together an organic bioelectronic device that completely mimic the functions of the human nerve cell.

Although the artificial neuron contains no living parts, it is still able to communicate with live human cells through chemical signals.

Prior to this breakthrough, scientists would stimulate neural cells through electrical stimulation. The artificial brain cell from Sweden marks the first device that uses chemical signaling to transmit and receive information to and from live human cells.

This technology has many applications, not least of which will be the ability to improve treatments for neurological disorders, which currently rely on traditional electrical stimulation.

These sort of disorders result when neural pathways break down. Information that’s supposed to flow from one part of the body to another can’t if there’s a breakdown in the neural system.

This new technique will make it possible to essentially bypass the damaged nerve cells by delivering chemical signals received from different parts of the body. That way, proper neural function can resume.

Next on the list is to shrink the device so doctors or surgeons can implant it in the human body. Part of this process will be to add a wireless feature to the biosensor, or artificial cell. That will allow for an alternate communication path to trigger neurotransmitters at distant ends of the body.

Let me put it this way: this technology could one day put an end to paralysis as we know it today.

If you are interested in learning more, and the market plays behind this exciting breakthrough, check out my Biotech Intel Trader service.

Ben Benoy

Editor, BioTech Intel Trader