Harry S. Dent Jr.'s Blog, page 25

Trump’s Immigration Fight Will Cost You

Just like investors tend to buy high and sell low, politicians tend to react to most major issues (ahem… immigration) by doing the wrong thing at the right time.

It’s no secret that almost all developed countries, and China in the emerging world, are slowing in workforce and demographic growth – many outright declining. Rodney talked about this just last Thursday. Five of the six smaller ones (which include Australia and New Zealand) that aren’t have one thing in common: strong and high-quality immigration.

You would think, with clearly predictable further slowing in demographic trends, that the developed countries would be competing for the best global immigrants. But most are restricting or fighting against it just as we need them the most. The U.S. fought against immigration going into the Great Depression. It’s doing it again now…

Immigration is slowing down…

The global migrant population is already slowing and peaked in 2005-10. Immigration into the U.S. peaked in 2001. And with the lowest number of births recorded in the U.S. since 1987, this spells trouble.

Look at this chart…

This should be a long-term trend as emigration slows after countries reach $8,000 GDP per capita PPP (purchasing power adjusted). The Factfulness book I so highly recommend also shows that life expectancy sees most of its acceleration by $8,000 GDP per capita. It doesn’t take a lot for people to have a decent and longer life and have less motivation to migrate, which is both costly and disruptive.

A recent Gallup poll showed that over 750 million people globally would emigrate permanently to another country if they could. This next chart shows where the highest percentages are by major global regions.

Not surprisingly, the highest, at 33%, came from the poorest region, Sub-Saharan Africa; followed by Latin America, non-EU Europe, and the Middle East/North Africa.

The surprise…

The surprise here is that the wealthier EU is the highest in the developed world, at a whopping 21% with North America second at 14%.

Note that numbers in North America have risen dramatically from 10% to 14% since Trump got elected… go figure!

The very highest percentage countries, where the most people would emigrate if they could, are the poorest ones, including Haiti, El Salvador, Honduras, the Congo, and Nigeria. However, they’re not necessarily the immigrants we would want to go after. To have a positive impact on our economy, we need more of the educated and ambitious immigrants.

That means we should encourage immigrants from China, Southeast Asia, India, the EU, East Europe, Puerto Rico, Chile, Argentina, and Mexico. Unfortunately, these countries are wealthier than their peers and will have fewer and fewer such candidates looking to move to America in the future.

Attract immigrants or die…

But we’ve got to figure something out, especially with the severity of the Baby Bust we’re experiencing. It’s simple: Attract immigrants or slowly die.

More importantly, attract skilled immigrants, and make the path to America clear and legal. We should emulate countries like Australia, New Zealand, Canada, and Singapore, who have effective immigration policies.

So, write to your congressperson. Send them this article. If we all say something, maybe someone in government will hear and begin to do the right thing at the right time. Our country – and your future wealth – depends on it.

Harry

What the Millennials’ Baby Bust Means for Your Money

The week before we married (and long before we had our first baby), almost 30 years ago, my new boss turned to me and said, “Son, you’re never richer than the day before you get married.”

Hmm.

For the next three years, I was reminded daily of his words. Decisions that I made alone before our marriage now required consent, or at least forewarning. But then I realized my boss had not just been wrong; he’d lied.

He knew the truth… 

It wasn’t the marriage that made you poor; it was the kids.

While my wife and I had to hash out how we spent our joint income after marriage, we still spent those dollars on ourselves, and we could make choices. When it came to kids, we had no choice. Whatever they needed, we bought, even if on credit.

As for our needs and wants, well, they ended up somewhere between “Maybe one day,” and “When we win the lottery.”

I don’t begrudge the kids. In fact, I’m jealous that one of my friends just had a baby. He texted and said, “I highly recommend that you get one of these!”

Granted, it’s not exactly his kid. It’s his first grandbaby. But that’s nitpicking. I still want one. Not just for my personal enjoyment, but for the good of the nation. When it comes to having kids, we’ve fallen behind, which will tear through our economy like a 100-car train wreck.

But as someone once wrote, a train wreck in slow motion is still a train wreck. And this one is happening right before our eyes…

The baby bust…

The Centers for Disease Control and Prevention’s National Center for Health Statistics estimates that last year we logged about 3.79 million births, which was down 2% from 2017. It’s the lowest level since 1987.

Keep in mind that during that time our population has increased, so on a percentage basis, births are even lower.

Populations need every woman of child-bearing age to have 2.1 children, enough to replace both parents and a little bit for mortality, to keep the population level flat. The U.S. hasn’t hit that mark since 1971. Last year, with births down 10 out of the last 11 years, we fell to the lowest level on record, 1.7 children per woman of child-bearing age.

Without children or a dramatic increase in migration, we won’t have a growing workforce, which we need to pay the taxes that will support our growing retired class.

Without kids, we won’t have millions of new parents who will need to buy stuff they didn’t know existed, and desperate to step up to bigger cars and houses as their children get older.

Japan has led the way…

As the Japanese proved by dramatically reducing pregnancies in the 1950s and 1960s, the economy looks great for a while as consumers spent on themselves, but as they age they move toward saving and get downright stingy. The result is a stagnating economy with little growth and interest rates near zero.

Our future doesn’t look quite so bleak. We still have migration. And while our birthrate is low, it’s still the envy of most other developed nations. But that doesn’t mean there won’t be consequences.

Recently the committee that runs the Medicare and Social Security trust funds reported that the funds will be broke in 2026 and 2035, respectively. We rely on payroll taxes to fund those programs. With fewer kids, we have fewer workers to pay the taxes. Those that remain will be required to pay a higher share of their income to support the growing, graying class. They won’t be happy about it.

And as Harry has written, there won’t be a Millennial rush to buy the aging McMansions of Boomers if they aren’t trying to put distance between themselves and several of their annoying teenage kids.

Besides, one of the main reasons we don’t have as many children is that Millennials are waiting longer. The only age group to log higher births last year was 35- to 44-year olds, implying that people are choosing to put off kids, at which point they typically have fewer. If it’s just the two of you and one child, do you really need 5,000 square feet?

Given that having fewer children can have a dramatic, and in many cases negative, influence on our economy, I for one am all for more kids. Starting with my own… Or at least, my own grandkids. I’ll even kick in for some music lessons along the way if that will help.

Rodney

Is Bitcoin Back?

100%.

That’s how much the price of bitcoin increased since December 31. At last check, the cryptocurrency was trading at $7,502, after jumping 14% on Friday and 7% on Monday. For non-mathematicians, that’s more than 20% in just a couple of days. Not bad.

So, are cryptos back?

If you’re looking for an investment with zero assets, no home turf, no management, and a side of adrenaline rush, then this is your baby. But if you want stability, as most people do with their currency, then take a pass.

And that’s the problem with bitcoin. It’s not stable and not used for many transactions. Other than that, it’s a perfectly acceptable currency!

As for why it’s going up, there are a couple of reasons, one internal and one external…

On the inside…

Bitcoin is headed for another “halvening,” which is the time when bitcoin miners earn half as much for their efforts because the algorithm controlling the cryptocurrency will reduce the amount of bitcoin created by 50%.

Without getting too far into the weeds, miners verify all transactions on the blockchain, and then add a small block of verified transactions to the blockchain. The entire process is computer intensive and uses a lot of power, so miners are paid in bitcoin. The controlling algorithm determines the rate of pay, and it drops by 50% about every four years.

By consistently lowering the number of coins created, the system is trying to maintain or even increase the value of bitcoin. If demand and use are growing faster than supply, then the price should go up, making everything purchased with bitcoin comparatively cheaper.

The next halvening will occur in May 2020, which seems like a long way off, but it’s possible that bitcoin investors are starting to build positions in front of that date.

On the outside…

We’ve got trouble in Venezuela, Iran, and now Argentina, all of which can drive bitcoin higher.

It’s difficult getting money out of failing economies. Generally, the ruling governments don’t like it, and they put strict limits on the amount of home currency that can be exchanged for foreign currency. If they didn’t, then everyone would try to get out of the home currency, driving it to zero.

By forcing locals to hold on to their national coin, the government is making them suffer through inflation and a falling standard of living. It happened in Venezuela over the last three years, where inflation now runs more than one million percent, and it’s starting to speed up in Iran and Argentina, with inflation of 40% and 60% respectively.

Cryptocurrencies give people a way to exchange out of their home currency and into something that can easily be accessed around the world. Granted, you’ve got to find a way to get your home currency to a bitcoin exchange, which can be tough.

But neither of these things – the halvening or the hiding of assets – makes bitcoin a currency. For that to happen, people need to use it buy stuff.

It has to become boring…

I remember the first time I saw my dad use a credit card to pay for gas at the pump. It was 1984 in Tampa, Florida. I thought it was magic. Never have to go inside? No waiting in line? Awesome!

Now, it’s boring. It’s normal. We frown on people who use cash at grocery stores, and noticeably tap our feet if someone tries – even tries! – to write a check.

Bitcoin isn’t boring as a currency; it’s time consuming and not easy. That might be why people are using it less instead of more.

Reuters reported on a Chainalysis study last year showing monthly bitcoin payments had dropped more than 80% from October 2017 through September 2018, falling from $426 million in December to $80 million in September. The survey covered 17 major bitcoin payment processors. Over the first half of 2018, Coinpayments.net reported a 50% drop in transactions across many cryptocurrencies.

Before we can call bitcoin a currency, it must be widely used in mundane ways, like at the grocery store and gas station. And a little stability would help.

Until then, it’s just a way for people to avoid government road blocks on capital (which isn’t necessarily a bad thing), and to gamble without a bookie.

Rodney

2 Scenarios For the May 2019 Market Correction

In my Economy & Markets video on Friday, I discussed why the trade deal has been challenging and likely doomed in the end. I also talked about the impact the “sudden” collapse in negotiations has had on the markets. Investors thought a deal was imminent. Now, they see it’s nowhere in sight… and they’re storming the exits.

Regardless of the reason, a correction was overdue… and I’m glad it’s finally taking place because it sets up the Dark Window finale perfectly.

As always, I have two scenarios for what comes next…

This chart may look a little complex because I’m including a number of charting concepts, but just focus on the simplicity of the two scenarios in the blue and red projections.

Note that I focus most on the Nasdaq because it’s the lead bubble.

Scenario #1: Meh…

The first scenario sees a shallower correction, not much lower than around 7,350 (down 10%) on the Nasdaq and 2,710 (down 8% or so) on the S&P 500… within about a month.

After that, it’s a rocket shot to the moon by as early as September. I’m talking 10,100 Nasdaq target and as high as 3,500 for the S&P 500. However, the broader indices may lag like they did into early 2000.

Scenario #2: Much Scarier

The second scenario tests and likely makes slight new lows into around late July or early August.

Then, it turns around and shoots to around 9,400 on the Nasdaq by early January 2020 or so.

Where did I get those 10,100 and 9,400 targets?

From the exponential progression I have shown in past articles, but starting from different lows. My exponential long-term trendline through the tops comes through around 9,400 later this year… and it would be typical to see an “overthrow” rally to something like that 10,100 target.

But look back at the chart and consider the green and black lines to the left. As you can see, the S&P 500 has formed a near-perfect megaphone pattern with higher highs and lower lows. It has completed (or near if there is one more quick bounce) an e-wave final top. This puts the correction target at the trend-line through the lower lows. That projects an S&P 500 of around 2,200 in three months or so.

This is important because it would potentially break the broader trend-line through the bottoms since 2009 at around 2,350, where the S&P 500 bottomed in December. As I’ve said many times, that’s a “line in the sand” for the index. Maybe it holds near 2,350. That would be optimal for the Dark Window scenario.

The bottom megaphone trend-line would suggest a bottom for the Nasdaq around 5,500 to 6,000. The lower number is its line in the sand through longer-term bottoms.

Note the “Holy Crap” marker…

If we break both of those lines clearly, then this bubble is very likely over. However, this is not a likely scenario at this point because the triple-top between January 2018 and April 2019 doesn’t look like a classic major bubble top.

I knew in November that the previous September 2018 peak wasn’t a top because it wasn’t acting like first crashes of past bubbles, where the trend was for losses of 42% on average in the first 2.6 months.

Also note the e-wave up to the recent top…

It was a classic rising wedge on the leading Nasdaq – and more so on the Nasdaq 100 (NDX) that marks near -erm tops. We have broken down out of that wedge and that increases the odds of a more significant correction near term. In other words, scenario 2.

If scenarios 2 is developing, and we see new lows over the next month, it should last three months and look more like the crash on September to December 2018. The first wave of that crash in the first month saw losses of 15% on the Nasdaq and 11% on the S&P 500.

That’s why its important how much the market goes down in these next several weeks, into say early June. If the markets are down 8% to 10%, we’re more likely in scenario 1. If they lose 11% to 15%, we’re likely to be in scenario 2.

This Dark Window move will surprise almost everyone and be very tricky. That’s why its important to keep monitoring it…

I’ll keep you updated.

Harry

Follow me on Twitter @harrydentjr

Uber et al: Unicorns Leading the Way to the Great Crash Ahead

Markets were badly shaken this morning as news of China’s planned tariffs on $60 billion worth of U.S. goods hit the wire. I emailed Boom & Bust subscribers earlier with an update on my Dark Window scenario, and some insights into what to expect over the next few months. I’ve labelled one possible outcome “Holy Crap,” so you might want to check it out.

All the red across the board isn’t doing Uber any favors. Talk about bad timing for an IPO. But even before markets began correcting, the ride-hailing company was not feeling investor love. It’s the 4th worst IPO in the last decade, closing on its first day 4.5% below its launch price.

That’s unusual…

These IPOs are priced a bit below what’s perceived as fair value and investors almost always fight over the stock right out of the gate. Not Uber though, and it’s another sign that we’re in the late stages of the tech and global stock bubble.

When we were in the late stage of the last tech bubble, in 1999, a swarm of Internet stocks with no profits, and only some with little sales, came out of the woodwork with super-high valuations. That’s what I call the infancy stage of a new technology where you actually see the most extreme bubble versus valuations (something Rodney will be talking more about in the coming weeks).

The next S-Curve wave emerges on a tiny scale as the previous S-Curve is peaking after surprising everyone with its growth and scale. That makes the new companies look like the next big thing. They may well be the next big thing, but not right at the beginning of the curve.

Yet, investors always over value technologies in their early stages… when they’re small, unprofitable, and slower to have impact.

Even worse…

They then greatly underestimate them in the longer term (that’s the trouble with our natural inclination to think in linear terms).

This is what’s going on with Bitcoin, cryptocurrencies, and blockchain technologies today. They’re in their infancy, just like the Internet was in 1999. Investors got burned… and then when the players were ready for the real lift off in 2001 – 2002, most missed the launch.

Mark my words: blockchain is the next S-Curve in the Internet arena. It’s the Internet 2.0, only on about a 20-year lag. Starting with a wild and crazy bubble based on minimal sales and no profits, by the top of the next global boom, around 2036/7, it will be one of the next big things.

This is also what’s going on in the present “unicorn” bubble of IPOs. Look at this chart of 12 recent IPOs, executed or about to…

Uber is the largest in sales, but nowhere near in the number of users. Of course, there is more revenue per user than on the typical online sites that have hundreds of millions of users in this table.

The important number to focus on here is Price to Sales, since most have only losses. Uber is higher than Lyft at 8.8 times versus 7.8. After all, it has more scale and leadership. Still, 8 times sales is a very high valuation. Normal companies would go for more like 1 times sales.

But the real story, as usual, is that the cumulative losses of these companies is only growing, with Uber the worst, losing near $14 billion.

It’s natural for early stage companies to lose money when they’re starting up and building to scale and breakeven. But there are serious questions about whether Uber (and many others) can ever be profitable.

Its margins are low, there are an increasing number of competitors like Lyft, and its drivers are barely surviving on low wages and long hours. It’s an ugly picture, with little in the way of hope.

This underperformance by Uber is not conclusive yet, but it looks like a sign of the beginning of the end, just like 1999 for Internet stocks. Bubbles are such that people end up greatly overpaying… chasing dreams, er… unicorns… and paying a nasty price. Then, when the greatest sale of a lifetime opens up before them, they’re gun shy! Don’t be one of those investors. Stick with us, and we’ll make sure you’re in the right place at the right time… at all times.

Harry

The U.S. China Trade Deal Fantasy and the Markets

Markets look to finally be making a much-needed correction, triggered by the U.S.-China trade deal drama. Everyone seems to think a deal is around the corner. Not me. While this trade war hurts them, they have a long-term goal, and they’re prepare to take all the pain in the world to achieve it.

I explain what this goal is in today’s video.

China has had the fastest three-decade urbanization and infrastructure-building program of any major country in history. They have the Belt & Road Initiative, building major infrastructures throughout Asia, Africa, the Middle East, and even Europe… recreating the Silk Road of old.

All of it is with one goal in mind…

Will China succeed?

I don’t think so, and I explain why in the video.

Harry

Crunching the numbers on today’s inflation

I recently had dinner with my extended family. Afterwards, my parents mentioned they were surprised at how expensive the meal had been. It was a nice restaurant, but nothing fancy. It worked out to roughly $50 apiece, before tip. As we left, we separately climbed into our newish cars, which all cost more than $40,000. My brother-in-law’s pickup tops out over $50,000.

But don’t worry, the government tells us, there’s not much inflation.

We could have chosen a cheaper restaurant, and less expensive cars, which is exactly the point the government tries to make…

The government wants us accustomed to the chained consumer price index (CPI), where prices move higher and we’re chained to a falling standard of living.

The CPI measures the price of a consistent basket of goods. Any change is inflation. Chained CPI takes into account that when something gets more expensive, we could use less of it. To the government, this means we no longer suffer inflation because we quit buying the expensive item, or at least we had the opportunity to switch.

Never mind that it was the high price – or inflation – that drove us to make the change!

The “Logic”…

Using this logic, there can’t be any inflation until we move to abject poverty, buying only the most basic essentials available on the market.

As prices move higher, we’ll switch from steak to hamburger, then to pork, chicken, and finally beans. The government won’t count inflation until bean prices trend higher and we’ve nowhere left to go.

The Trump administration wants to use chained CPI when increasing the poverty rate, which would make the measure increase slower, thereby cutting the number of people who qualify for benefits such as supplemental nutritional assistance (SNAP) and Medicaid.

The Obama administration tried to do the same thing with Social Security cost of living adjustments… but was roundly condemned for it and backed off.

You might not think this matters to you, since you probably don’t receive government assistance; but don’t worry, they’ve already painted a target on your back.

Part of the 2017 tax reform was to index tax brackets to chained CPI instead of traditional CPI. This makes tax brackets increase slower than they would have, leaving more of your income subject to higher tax rates.

The game doesn’t stop there…

The government also adjusts the price of products to account for changes in quality or functionality. On its website, the Bureau of Labor Statistics (BLS) gives an example.

Suppose an old cathode ray television (CRT) cost $250 but isn’t available anymore. A new LCD television costs $1,250. You might think inflation should be 400%, but the government estimates the value of every aspect of the television from the bigger, better screen to the remote control, and how much “more” you get from the new unit.

Magically, they determine in their example that the price of the television actually fell 7%.

What would make this laughable if it weren’t so perverse is that the old television isn’t available anymore. Consumers don’t have a choice about which television to buy, and are stuck paying $1,000 more, even if they don’t want the new features.

The BLS notes that it makes adjustments both ways, sometimes increasing the price of goods or services for the purpose of determining inflation. I’ve never seen it, but I think they should.

Think about cell phones…

The government dramatically lowers the price of your phone because it has cool features that most of us will never use. But now we’re subject to 167 million robocalls per day, roughly 50% of all cell phone traffic. These calls impede our workflow by distracting us from our tasks. That should definitely count as higher inflation!

At the very least, we should keep track of all the adjustments the government makes to prices, comprising something of a standard of living index. The end result would be a percentage of the median family spending budget that the government makes disappear through mathematical calculations.

We can call the government-determined spending “fantasy,” and the unadjusted spending “reality.”

The difference between the two also has a name: “financial pain.”

It’s the pain when contracts allow for increased payments at the rate of inflation but don’t rise fast enough to cover actual spending. It’s the pain we feel in our paychecks that are supposedly rising faster than inflation, but won’t cover the cost of medical bills or tuition.

The solution is to increase our personal wealth through investments faster than the government rate or even personal rate of inflation. But that option isn’t available to everyone, which is why the government will need to find even more ways to take your money in the form of taxes in the years to come.

Instead of worrying about Greeks bearing gifts, beware of government bureaucrats doing math. It never comes out in your favor.

Rodney

The Dangers Beyond the China-U.S. Trade War

U.S. markets have had a bad week. After reaching all-time highs recently – the Dow at 26,656.39 on April 23 (not quite new high), the S&P 500 at 2,945.83 on April 30, and the Nasdaq at 8,164 on May 3 – they’ve spent the last three days in the red. Monday, the Dow shed as much as 1.8% before pulling back to close only slightly lower. On Tuesday it had bled 1.8% by the close. The Nasdaq dropped 2.2% during trading before clawing some of that back. It ended trading on Tuesday 2% down.

In fact, the Dow had its worst day yesterday since January 3.

From the sounds of it, investors are unhappy with The Donald’s China trade deal tweets on Sunday. Really, they could have chosen any issue at hand – there are so many – for a reason to correct, but a correction was due regardless… because a pause is needed before the final blow-off rally in my Dark Window scenario.

All the “good news” lately – the lowest unemployment number in the last five decades, average hourly earnings up 3.2% over 2018, first quarter GDP of 3.2%, as Rodney mentioned yesterday – hasn’t given investors sustained confidence because… well… most of them know, like us, that it’s all B.S.

Just hot air…

Employment numbers, GDP “growth,” stock market highs… none of it has any fundamental foundation. It’s all the result of Fed stimulus, the resultant stock buy-backs binge, and then The Donald’s tax cuts last year.

In fact, despite the good Q1 number, our real cumulative GDP growth over the last 11 years has been worse than GDP growth during the Great Depression (19% between 2007 and 2018 compared to 20% between 1929 and 1940).

The fact of the matter is, any connection between the markets and the economy is now tenuous at best. Stocks are 120% overvalued versus my proven Spending Wave, with all of that due to goosing earnings per share versus total earnings through stock buybacks. And that sets us up for the worst kind of thrashing when this bubble bursts.

What Most Don’t See

Most people see that the Fed stopped printing money by late 2014, after tapering their printing gradually over a year. They see that the Fed started raising short-term rates in December 2015. And they see the large corporate tax cuts at the beginning of 2018.

What most people don’t see is the global picture…

Europe started printing again when we tapered in 2014. Talk about tag-team wrestling.

And Japan? It went off the reservation in early 2013, printing at three times the peak rates of Europe or the U.S. as a percent of their GDP, and never slowed down.

Japan’s balance sheet, as a percent of GDP, is now 101%… with most of that added since early 2013.

Europe’s is at 40%.

We’re only at 19%, cumulative, after a peak of 24%. We’re the best house in a worsening neighborhood.

We tapered first. We shifted from lowering to raising short-term rates first. No major central bank has raised short-term rates yet. But we alone passed major tax cuts, which are a direct stimulus to businesses and stock prices. Again, despite this, our real GDP growth is slightly worse than those Great Depression years.

Here’s the big picture on money printing from PIMCO.

Note that this chart includes the big four – the U.S., ECB, China, and Japan – along with 18 other central banks. Sure, the big four account for about 76% of the global money printing, but that extra 24% is added stimulus that we don’t see or hear about.

At the beginning of 2018, cumulative central bank assets were just over $26 trillion, up 173% since QE started in early 2009.

Our tapering, as long as Trump will permit it to continue, and the little from China have brought that number back down to near $25 trillion. But that won’t last. Not with slowing economies around the world.

Europe has been slowing markedly since the beginning of 2018. Japan is still slowing with breakneck speed.

Every Brick Counts…

Those extra smaller central banks account for about $6 trillion of the total global balance sheet and $3 trillion in additional printing since QE. Nevertheless, it’s more bricks to the wall of money and printing.

That $16.5 trillion of printing we’ve seen since 2007 is 37% of developed country global GDP and 21% of total global GDP. Adding Trump’s tax cuts of $1.5 trillion takes those numbers to 40% and 23%, respectively. That’s enough stimulus to add 4.0% annual growth since 2009 to developed countries, or 2.3% a year to total global GDP…

Yet the best we’ve managed in the U.S. is 3.2% recently for one quarter, and we’ve still averaged closer to 2% since 2008.

Without it all, we would have endured the second Great Depression. Instead, we got a great recession followed by the lowest growth in history.

That doesn’t mean we’ve dodged the bullet. Rather, it means we’ll take the blow at the end of this Economic Winter Season.

The worst part is ahead.

Oh, and right on cue within my 90-year Bubble Buster Cycle!

I have to admit, years ago I didn’t think we could get to where we are today.

The first major financial crisis (in 2008) played right into my demographic Spending Wave cycle, as I forecast all the way back in 1988.

The second major financial crisis just ahead, created entirely by unprecedented central bank stimulus, plays into this most extreme of all 90-year Innovation and Bubble cycles.

This leaves you with two choices: ignore our research and guidance and be wiped out with the majority lead by the nose from central banks and Wall Street… or keep reading and be ready to grab the Dark Window opportunities before it all falls apart AND the sale of a lifetime opportunities that will appear after the great crash ahead.

Harry

Where Growth Is Free and Everybody Gets Rich

Employment numbers came out last week and showed unemployment at a 50-year low. Average hourly earnings are up 3.2% over the past year. Add in the equity markets at record highs, GDP at 3.2% in the first quarter, and 10-year bonds at 2.5%, and you might be forgiven for thinking we’re in economic growth nirvana.

But this is no fairy tale. There’s no Goldilocks story where everything is “just right.”

We haven’t achieved some beautiful equilibrium where growth is free and everyone gets rich. We’ve simply transferred wealth to those who could buy real estate or intangible assets after the financial crisis, and now we’ll have to claw it back from them to pay for everything from social services to infrastructure.

There’s no free lunch. It’s been more like an all-you-can-eat buffet… and we’ll pay at the end.

If you’re not seeing this gathering storm, you’re not paying attention.

Neighborhoods south of mine are still recovering from Hurricane Harvey, almost two years later. Hurricane Michael flattened Tyndall Air Force Base near Panama City, Florida. Neither area can get to disaster funds at the moment. As the Wall Street Journal reported over the weekend, they’re hobbled by the same thing: Puerto Rico.

A One-Way Street

The commonwealth spent its way to bankruptcy, only to be hit by Hurricane Maria, but then squandered recovery funds, and now the Feds aren’t dispensing any recovery dollars. As for the bankruptcy, the committee overseeing Puerto Rico’s finances just declared two bond issues from five years ago invalid. If you own the bonds, you’ll get a letter demanding you return all interest received. But you won’t get your investment back… it’s a one-way street. Detroit did the same thing in 2014.

This exact situation is coming to a town or state near you, especially if you live in Chicago.

Houston, just north of me, is grappling with new legislation to give firefighters a raise to reach parity with police officers, but the city can’t raise taxes without a vote. That leaves the mayor with one option: fire a bunch of firefighters. That’s always popular…

Many cities and states are strapped, and even those that appear flush (looking at you, California) have pension liabilities that will swamp their finances in the years to come.

So far, the federal government has been able to skate by borrowing more. They’ve done it for more than a decade, to the point where we’ve named the ability to borrow however much for however long “Modern Monetary Theory.”

But there’s nothing modern about a debt binge without thinking the consequences apply to you. It’s a phenomenon as old as money itself.

The bill will come due…

First, at vulnerable cities, then states, and then finally at the national level. Interest rates will creep higher, driving up debt service payments, squeezing already tight finances. Before then we’ll most likely give away more seemingly free stuff, like health care and education, which will only make matters worse.

When politicians look for a way to pay, they’ll find those of us who either deliberately chose, or were simply lucky enough, to buy real estate and intangible assets, and then hold on as the Federal Reserve cranked up the printing presses and drove monstrous inflation in those two areas.

We’ve been borrowing for mortgages at sub 5% for a decade, and companies issue debt to buy back stock. It’s been a good ride.

The Target On Your Back

But pay attention to the changing winds among Democratic presidential hopefuls. They’re saying things that would have been laughable just four years ago, and absurd during the 2000s.

No one’s laughing anymore…

Pick any pithy response to socialism that you want. I like, “It’s a system that makes everyone equal by taking from the rich until everyone is equally poor.” None of them will sway someone who can’t scrape together $500 for an emergency, which happens to be 40% of adults.

More free stuff sounds great… More free stuff that is effectively paid for by someone is okay, too…

I’m planning for a future marked by higher taxes at every level, and it’s already starting. My little town just increased sales tax to the state maximum of 8.25%, trying to avoid higher property taxes.

It will work for a year, maybe two. But then property taxes will go up as well. We have roads to fix… pensions to pay.

It’s one of the reasons I’m selling my home…

I also see the fabulous ride in equities ending as economic growth slows down. But it will happen just as municipalities must deal with the reality of busted finances. They’ll demand more.

We should still have relatively full employment as Boomers retire, but they’ll take the bulk of financial assets with them, so taxing authorities will follow the money, implementing levies that seek out wealth.

Will it be John Hickenlooper’s proposal to move capital gains tax rates to ordinary income tax rates, or Elizabeth Warren’s higher personal rates and tax on accumulated wealth?

I’m not sure, but I’m not waiting around to find out…

I’ll earn what I can while the markets reward risk takers, but I’m keeping a close watch, waiting for the time when Harry’s Dark Window closes.

It will be best to have a smaller footprint when that happens. It will make you a smaller (tax) target.

Rodney

How We’ll See Deficits at $40 Trillion in a Few Short Years

Smart people are worried. They should be.

Never mind the chaos around the world (like mass shootings, terrorist bombings, Armageddon marches, etc. ad infinitum), it was recently report that Christine Lagarde, the managing director of the IMF, is “doubly concerned” about the level of global debt. She was speaking at the Milken Institute Global Conference last week, where she explained why excessive debt is going to become a serious problem for developed and developing countries alike.

In case you’re wondering – I had to look it up – the Milken Institute is a research driven, non-partisan think tank that develops policy initiatives aimed at increasing economic growth to improve the standard of living for people across the globe.

I assure you. The levels of global and U.S. debt are way beyond concerning. They’re also way beyond being repayable.

Did you know that our very own Federal debt has been doubling about every two administrations, or every eight years? It went from about $5 trillion to $10 trillion under President Bush’s two terms… from $10 trillion to $20 trillion under President Obama…

At this rate, the $20 trillion debt that Trump walked into when inaugurated in early 2017 could be close to $40 trillion in early 2025, when his second term is up (if he survives in the White House through the crash of a lifetime, that is).

We’re well on the way too. Our Federal debt is already up $1.5 trillion in the last two years, and these are supposed to be the “good times.” When the shit hits the fan early in 2020, that number is going to explode into the stratosphere. That’s what happens to deficits during bad times. They increased 122% (more than double), in the aftermath of 2008. 2020 will be infinitely worse, so debt growth will respond accordingly.

This first chart gives us an idea of what this looks like…

Look at how much more the total deficit was from the operating deficit in 2008. The total Federal deficit was 122% more than the operating budget deficit that year. That’s what happens when you suddenly get a deep recession. Now imagine what that number could look like when a depression like the early 1930s sets in. That’s what I expect we’ll see at the end of this Dark Window.

The average over-spending from off-budget items like veterans benefits or Iraq/Afghanistan wars, or pollution clean-up, is 45% a year.

This is kind of like corporations on Wall Street. They emphasize their profits after non-recurring losses are subtracted. But many companies constantly have such losses from one source or another, so that’s an illusion. It’s all number magicking and accounting shenanigans.

This is worse with our government having 45% such off-budget overruns.

Our current $21.5 trillion debt is 14% higher than it would be at $18.8 trillion without these overruns – and that’s just the last 10 years. That’s nearly $3 trillion higher and makes the difference between 106% of GDP and 93%.

History shows us that more than 80% is considered dangerous and slows GDP growth substantially. In 2008, it was a mere 68% of GDP. Ah… the good old days…

Yet the Worst is Ahead

A growing number of people are alarmed at our deficits and debt, me included. It’s spiraling out of control, and the worst is still ahead as the Baby Boom hits peak retirement into 2029.

Those forecast Social Security and Medicare deficits will be worse than imaginable as the economy continues to slow due to near zero workforce growth and low productivity related to aging.

Seriously though, is $40 trillion by 2025 even possible?

Unfortunately, yes.

This means you need to pick your investments with great care, and prepare your business now. If you’re ready, you can take advantage of the sale of a lifetime ahead.

Harry