Harry S. Dent Jr.'s Blog, page 147

Cash Is King in a Depression… Just Ask the Mafia

Many people are aware that the mob made a fortune in illegal alcohol due to Prohibition in the Roaring ’20s.

But most aren’t aware of how they made their greatest profits during the Great Depression: They became loan sharks.

One of the rising mob bosses was “Lucky” Luciano in New York. With the help of Meyer Lansky — the ultimate financial genius, also called the “Mob’s Accountant” — and the infamous Bugsy Siegle, he implemented a strategy that helped the mob thrive during one of the worst downturns in history.

It was a simple matter of supply and demand. When the Depression hit, people and businesses couldn’t get loans. So the mob took the money they got from bootlegging and started lending it out at shark rates of 20%-plus.

To put it in perspective, that’s similar to what credit cards charge over-spenders with questionable credit today!

The mob was able to enforce these high rates for one simple reason — they were the frickin’ mob!

It’s not that people and businesses didn’t have previously existing loans from the banks. Some even got money from relatives and other lenders. But they can’t kick your ass and break your legs like Luigi can!

So who do you think got paid first? That advantage reduced their risk in a high risk period.

And even when borrowers couldn’t cough up the cash after breaking their legs, the mob just took a chunk of their business to create future cash flow for when the economy ultimately turned around again.

So not only were these mobsters raking in high cash flow from high interest rates, they were taking over businesses in dynamic growth cities like New York when they were the cheapest they would ever be.

Lending high and buying low — it’s the perfect winter season strategy.

Just think about how Joseph Kennedy made his family fortune during the same period. He made much (if not most) of his money bootlegging in the ’20s, then sold his stocks in late 1929 when a shoe shine boy started giving him tips — a sign that speculation had really gone berserk!

Finally, when the stock market went down by as much as 89%, he reinvested that money. With that cash, he bought the bargains of a lifetime in financial assets when no one else did, and few could.

Think about it: He became so successful, he switched from an illegal business to a legal one and even had a kid become President. He went from near-mob to a royal family.

I’m not telling you to break people’s legs or start an illegal business venture to make money! I’m telling you how powerful a depression can be if you have the cash and cash flow to take advantage of it.

But cash isn’t the only strategy the mob used. They also practiced the delicate art of consolidation. And they did it during a winter season, when market share shifts long-term to the largest and most efficient businesses (legal or illegal) while most fail.

Coming out of the Roaring ’20s, the top crime boss in New York was Joe Masseria. For awhile, Lucky Luciano worked under him. But there was a new ruthless up-and-coming mob boss that came to America when Mussolini started locking up anyone even suspected of being in the mob in Italy.

In New York, Luciano “took care of” Masseria to get closer to the new rising boss — Salvatore Maranzano, from Sicily. And when Maranzano got greedy and refused to share the top spot as promised, Luciano killed him too. That’s what I call consolidation!

With Meyer Lansky and his new mob family, Luciano became the “Godfather,” or “boss-of-bosses” in New York… like Michael Corleone in the infamous Godfather movie (which, mind you, has facts mixed with some fiction, but it’s characteristic over the same time period).

Luciano was driven by greed and power. But in practical terms, he consolidated his illegal industry during the most economically trying period of the 20th century.

That’s not all — he created a new long-term mob empire and growth path for decades to follow, by being stronger when everyone else was getting weaker.

So what can you learn from this as we get closer and closer to the next great depression?

Sell financial assets, speculative real estate, and parts of your business you don’t dominate now. Do it ahead of the next crash which could start as soon as this summer and accelerate in 2016.

In your business, focus on your strongest sectors. Now’s the time to get lean and mean. Doing this should darn-near guarantee you’ll survive and out-live your competitors. And you’ll make money doing it, too — in the short term, but even more so over the long term.

There’s an old joke: “If a bear is chasing you, you don’t have to outrun the bear, just your friend.” That’s what the bear market and winter season is about — narrowing the economy down to the strongest and most efficient competitors.

Finally, do what you can now to protect your income and financial assets from rising taxes. They’re sure to come, especially in the next two administrations.

One way to do that, is sell highly appreciated financial assets before the government raises capital gains taxes to ordinary rates. Those rates will only rise in the years ahead for the more affluent.

Our country is about to face some hard economic choices. Seeing them coming before they happen will help you protect your income, your retirement, and your cash. Rodney goes in depth into this in

S&P 500: Even the Bottom 5% Is Overpriced!

Recently, I was reading a book about Sir John Templeton, one of the greatest investors of the 20th century, who had a nearly unparalleled long-term track record.

In 1939, while World War II was raging on, he bought 100 shares of every stock trading below $1 per share.

Four years later, a third of those companies were bankrupt. But with the remaining two-thirds, he had quadrupled his money.

So, I compared his situation to today’s. I found this chart of low priced stocks in the S&P 500. And sadly, we’re far from Sir John Templeton’s territory!

The top of this chart shows the S&P 500 as a whole, while the bottom looks at the 25th cheapest stocks in the index, or bottom 5th percentile. $6 a share would put us in Templeton’s range. But today, those stocks are right around $20.

As you can see, today even the cheapest stocks are overpriced. We are in the second highest speculative phase in over 40 years. Only in the Internet Bubble were the bottom 5% of stocks priced higher than they are today, and not by much.

This indicator signals major turning points. We are in an extremely speculative phase of the market that, if history is telling, suggests now is the time to sell these low priced stocks, not buy them.

Of course, it’s never a good idea to use one indicator to trade the market. The market could go lower, and it could go higher. One indicator doesn’t tell the whole story.

However, this is a great indicator to make you aware of the fact that the market is in a speculative phase. And there’s no denying we’re in the riskier end of the spectrum.

If you sold in 1997 and 1998, you would’ve been too early. The same for 2007. But in my opinion, today looks like the right moment to rid yourself of these cheaper stocks if you have them.

It doesn’t take long for exceptional buying opportunities to re-emerge with these lower priced stocks. 1991, 2003, and 2009 all fit that bill.

The only thing required is patience.

John Del Vecchio

Contributing Editor

Momentum Investing: How to Not End Up Old and Broke!

My kids will never be farmers. They won’t be ranchers either. And I doubt they’ll ever own an industrial-sized chicken coop (what a mess!). Like most everyone else, I presume my children will be urban professionals their entire working lives, hustling for promotions and bigger paychecks.

This is a problem for me. And, chances are, it’s a problem for you as well.

For centuries people by and large grew their own food, were self-sufficient, and took in aging relatives. It was a hard living, but it was still a living. For older folks, it meant knowing where they would end up when they could no longer work.

Those days are gone. Now everyone keeps their own household until they move to assisted living, enter a nursing home, or die.

I don’t know when I’m going to pass. I imagine my wife and I will live most of our days on our own. Eventually we’ll end up in a facility of some sort. It’s something I’m not excited about, and I’m especially not looking forward to paying for it.

But unless I want to end up broke in my old age, I have to plan for this path, which means slogging through financial data ad nauseam, developing and implementing investment approaches that I believe will help me reach my goal.

I know I’m not alone in this. We all work on growing our wealth to finance retirement. And we all worry about it, because if we come up short, it means suffering with a lower standard of living when we’re too old to rejoin the workforce.

To reach our goals, we’ve got to make saving and investing personal. We can’t rely on averages. None of us are average because we each have our own set of circumstances. Long-term portfolio calculations based on average returns won’t pay the bills.

We need concrete action plans that make sense and limit risk. That’s why we have such a strong emphasis on momentum here at Dent Research, along with an eye toward hedging. The objectives: speed, and safety.

Our overriding theme is still demographics, and our main body of work will continue to follow economic and financial trends around the world.

The trick is putting research into action.

From Adam O’Dell’s Cycle 9 and Max Profit alerts,

Correction Protection: Have You Insured Your Summer?

Two weeks ago, I explained that the stock market

This Disruptive Technology Could Change the Future of Agriculture

When a business closes and gets kicked out of its building, it’s common for another business to sign a lease… especially on valuable real estate. But this might be one of the weirdest exchanges I’ve ever heard.

Newark is the largest city in New Jersey. It’s a major commercial destination. The last thing you’d expect to grow in the middle of a place like this, is a farm.

A new startup called

The Real Reason the Fed Didn’t Raise Rates!

Instead of taking its chance to continue normalizing monetary policy last week, the Fed didn’t do jack-squat. I say “continue” because they started to normalize policy when they stopped buying bonds back in October.

The Seeds of the Next Economic Boom

I recently had the pleasure of visiting with a friend in Texas that I’ve known for almost 20 years. She has a young family, so we met at her 8-year old daughter’s soccer game. This was the fourth game of the day for the young athlete, and she would play another game in the early evening.

It was over 90 degrees out. There was little shade. While my friend’s oldest was out in the field, her 5-year old ran around playing with other kids, and her 3-year old napped. As we sat and talked it reminded me of when I was in her place, lugging my kids and their gear to different fields, rain or shine.

I’m glad I did it, but I have zero interest in doing it over again. It’s time for the next generation to do its part. So thank goodness they finally are… not only on the soccer fields, but in family life in general!

According to the Centers for Disease Control and Prevention (CDC), the number of annual U.S. births

Insider Trading: What Are They Buying Today?

Back in April, I wrote a piece on

Deflating the Oil Glut: First Supply, Then Demand

They call it an oil glut for a reason.

There is too much oil in the system today.

Organ Engineering: Fast Track to the Real Thing

Remember how you used to need to find someone with a healthy liver or kidney if you needed a transplant?

Okay, technically you still do… but this could end in the coming years.

Scientists are making quick work in creating “engineered tissues” in labs with which they can make a fully functioning human organ.

Most advanced labs can already use 3D printing to create something resembling a human organ. The trick is actually making it work like an organ.

There are tons of different scaffolds and blood vessels and whatnot that deliver nutrients to the organ. Not to mention all the interconnectivity with the brain and other parts of the body that are way too complex to get into here.

Medical research is already employing these engineered tissues. In some cases they’re being used in clinical trials.

All sounds pretty normal. But it gets weird.

The most highly engineered organ models… don’t actually look like organs at all.

They’re made using manufacturing techniques similar to those used to make silicon microchips in computers. It’s a complicated process involving silicon, ultraviolet light, 3D networking, and of course cells of the desired organ type.

What researchers have ended up with is something that truly mimics an actual organ.

And while these organ models aren’t in development for human use (yet), they’re telling researchers a lot about how organs spread through the body.

It gets better — they’re also useful for testing new drugs. Forget animal and human testing! This is much more ethical… and it speeds up the process, too.

Whether this technology is used to patch a damaged heart, give us greater insight into brain disease, or whatever — it will give scientists much needed understanding of how our bodies work so they can better help people.

Several companies are beginning to make a major impact in this area.

Ben Benoy