Harry S. Dent Jr.'s Blog, page 5

Pay Your Taxes

I received a dreaded audit letter from the IRS in 2015, covering the 2013 tax year. I contacted my CPA, gathered my documents, and made the trek to their office at the appointed time. After 90 minutes, the auditor determined I underpaid on my 2013 taxes by $37. He was wrong, but any net change of $200 or less is considered a “no-change” audit, so I didn’t push it.

My audit ended well because I pay my taxes. Most of us do, but there’s a significant portion of Americans who don’t. They underreport their taxes, underpay them, or flat out don’t file.

That’s not fair to the rest of us.

The difference between aggregate taxes owed and those paid is called the Tax Gap. During 2011 to 2013, the latest data we have available, Americans underpaid their taxes by $405 billion per year. That Tax Gap drops to $381 billion after enforcement and late payments. Uncollected tax dollars increase our annual deficits and then our national debt. The gap between what we owe and what we pay is remarkably stable, hovering around 15% to 18%, and was $290 billion in 2001.

If the federal government collected just $250 billion more per year in taxes for the last 30 years, it would have trimmed $7.5 trillion off of our national debt of $23 trillion. We also would have saved the interest we didn’t have to pay on that extra debt.

As weird as it might sound, we need more IRS agents, and we need more capital spending in that department.

From 2010 through 2016, we starved the IRS, cutting the budget to the level of 1998. In 2017, we had 9,510 auditors, one-third fewer than in 2010, and about the same number as we had in 1953. Many of the systems used by the IRS today were created in the 1960s. Their computers and software should be updated to this century, at least. President Trump’s budget proposal would raise the IRS budget from $11.51 billion to $12 billion, which is a good start.

One estimate shows that for every additional dollar we spend at the IRS, we collect $7 in additional taxes.

Individuals are responsible for the largest amount of unpaid taxes, accounting for $319 billion of the average unpaid taxes from 2011 through 2013.

We could follow California’s lead, making filing as easy as possible by sending workers pre-filled tax returns that they can electronically affirm and send in.

California runs a tax prep program called ReadyReturn that uses the W-2s of workers sent in by their employers to create pre-populated state returns. Workers log into the program to check over the documents and click to agree.

There’s no reason we can’t develop the same system for federal income taxes. For workers with one employer who have simple returns, they should be able to click on a pre-populated document and send it in.

This won’t do anything about those who don’t claim business income on their taxes, but it should help with a portion of non-filers, which would free up assets to investigate others while also bringing in tax revenue.

With our annual deficit approaching $1.4 trillion, we need all the help we can get. Before we levy new taxes on those of us who already pay, let’s get everyone to kick in what they owe.

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Fed Continues on High Side of Sideways in Stimulus Since End of 2019

As I have been following, the big event in the past 4.5 months has been the Fed moving back to aggressive stimulus since the repo crisis. The printing of money to buy repos and T-bills reached a peak of $424 billion in late December and has moved sideways since and was at $418 billion last Thursday.

At first it was emergency funding of repos. Then it was increasing old-fashioned QE through buying T-bills to replenish bank reserves so they could fund the repo market again. As a result, for the past few weeks repo funding has declined and the approximate $80 billion a month in T-bill QE has mostly just offset that decline.

It does appear the Fed is committed to this $80 billion in QE for the near future. The trillion-dollar question is: Do repos rise again in needed funding, or continue to fall and offset the QE?

And recall: it doesn’t matter what the Fed buys – repos, T-bills, T-bonds, etc.—it is adding new money to the pool of financial assets and pushes them up and it always ends up most in stocks.

Hence, the stock market has been rising on a 2.5 – 3.0-week lag since the mid-September QE surge, now higher than peak QE in 2014 at $60 billion a month.

Here’s the new indicator that we update every Thursday evening for the net rise or fall in the Fed balance sheet and its close correlation with stocks on a lag. Stocks are now at the highest point — 9,748 on the Nasdaq recently — compared to this indicator that has been more sideways since it peaked at $424 billion.

Given the Fed’s pause since over the last 5 weeks, I would expect a correction in the coming weeks, likely into late February or early March. If that correction can hold close to the lows of 9,200 on the Nasdaq on January 27, down 7% or so, that would be bullish…

But the most bullish sign would be if net injections, or buying of assets, starts to rise again to new heights.

We will keep you updated. This is our most important short-term indicator on bubble watch.

I still see the markets going higher as we have not yet reached the top exponential trend-line for the Nasdaq which is about 10,000 today and will head towards just above 11,000 by the election. That is when the markets get to a higher risk of a bubble top.

I see a range between late May and February of 2021, with August to October as the most likely final top at this point. A final throw-over rally could take the Nasdaq higher than these targets before the first 40%+ crash that ends the bubble.

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The World’s Best Financial Minds in One Room

Just returning from the Tony Robbins Platinum Finance event in Sun Valley, Idaho, I wanted to share some of my biggest takeaways I think all Economy & Markets would benefit from hearing about.

One of my favorite speakers, whose background is in history, Niall Ferguson, author of the international bestseller, The Ascent of Money kicked things off. Niall talked about why he’s long America, short China… and shared his insights on why China represents the epitome of this massive debt bubble.

I also really enjoyed Ray Dalio, who’s the largest hedge fund manager ever, returning more money back to investors than Warren Buffett. Ray shed light on his research into long-term economic trends and what cycles are most critical in predicting the markets. You’ll want to hear how Ray’s forecasting fits right in with a lot of my cycle research.

Eric Prince, founder of Blackwater talks about where he sees opportunities overseas, including opportunities in China and emerging countries for minerals, metal and energy in line with my next 30-year commodity cycle after 2022.

Paul Tudor Jones, perhaps the most successful individual trader in history shared his insights on the current state of this unprecedented stimulus, where he thinks the stock market sits now… and when things could change.

Finally, Bill Gross, a brilliant, serial entrepreneur talked innovation and what it takes to succeed as an entrepreneur and radical innovator in today’s unforgiving and ruthless market.

Check out today’s rant for more details on all these great speakers and the biggest insights I took away as an economist, in forecasting the upcoming crash.

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Puerto Rico: A Disaster That’s Already Happening

One of my best friends in college hailed from Puerto Rico, the daughter of Cuban immigrants. I went to her wedding in Old San Juan and enjoyed a glorious few days on the island. Harry moved there a few years ago and often speaks of the beautiful setting and wonderful restaurants.

I get it. The place is gorgeous. But it’s also a disaster unfolding before our eyes, and it serves as an example of what’s to come on the Mainland.

I’m not referring to Hurricane Maria, or even the recent earthquakes. I’m talking about a man-made problem that will swallow the island hole: their self-inflicted debt problems and, more specifically, their pensions.

Puerto Rican finances are back in the news, although they’re rightly overshadowed by the spreading coronavirus. But if you happened to catch it, the Congressional Financial Oversight and Management Board (FOMB) just reached a deal with bondholders, which now goes to a bankruptcy judge for approval.

The deal calls for general obligation bondholders who own $35 billion in debt to accept $11 billion. The bondholders will get fewer bonds that pay less interest and have shorter maturities. They agreed to the deal because the FOMB threatened many of them with the prospect of long legal fights that could end with no compensation.

It’s worth a short refresher on the specifics. Puerto Rico’s Commonwealth Constitution specifically requires the island to pay lenders before paying any operating expenses such as salaries, rent, etc. The government ran up $35 billion in just general obligation bonds (there’s more debt for the power authority and others), and then claimed it couldn’t pay, stopped paying principal and interest, and sought bankruptcy protection. The government specifically broke its constitutional law by not paying the debt.

The FOMB claimed that bonds issued after 2012 might have been illegal because they put Puerto Rico above statutory debt limits. The remedy? Not pay those bondholders, and claw back any previous interest and principal payments.

That’s right. If you bought bonds duly issued by Puerto Rico, complete with a legal opinion and the affirmation of the Commonwealth government, they were still going to claim the bonds were illegal and, instead of giving your money back for their misdeeds, punish you by keeping your cash and demanding back any payments made.

And there’s precedence. This is exactly what Detroit did during its 2013 bankruptcy, although those bondholders didn’t have a (worthless) constitutional guarantee.

It gets worse.

Puerto Rico’s governor, Wanda Vázquez, doesn’t like the deal. She claims it doesn’t provide enough sweeteners for the Puerto Rican pension fund. That’s because the pension fund that Commonwealth government ran into the ground isn’t part of the equation.

Puerto Rico’s state pension has $50 billion in liabilities, and zero assets. What sort of sweetener does she want? Over the past several decades, administration after administration promised benefits it couldn’t pay and didn’t set aside the necessary funds.

If you ask who is supposed to pay for that, the governor has an answer. You are! First as an investor holding Puerto Rico bonds, where your claims should be slashed to zero, and then as an American taxpayer.

Just like Detroit before them, and soon Chicago and the state of Illinois after, Puerto Rico is a shining example of the growing cancer in American government finances. When it’s time to pay for the cure, there will be much handwringing about hurting those who worked a lifetime and only want what they were promised. After “much” deliberation, politicians will do what they call “the hard work” of compromise to find a solution, your investment and tax dollars.

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Flying Blind on the Coronavirus

I have now heard from three experts that this coronavirus is at least 10 times worse than the Chinese government is reporting. First a top military consultant; then John Thomas (Editor of the Mad Hedge Fund Trader), who sat next to an expert from Wuhan on a plane; and recently from Erik Prince, the founder of Blackrock (the infamous black ops company).

Now I am looking at the most recent reports, seen here below, and something looks a bit fishy right off the bat. The infections and deaths are correlating in real time, which means they are surging together. That doesn’t make sense unless people die almost immediately once the symptoms emerge.

So, we are flying in the dark here, as the Chinese government is notorious for manipulating and suppressing bad news. But if these three experts are right, and things are really 10 times worse than what’s being reported, the infections could already be 400,000+, with deaths over 10,000.

Experts from the University of Hong Kong are also all over the map in forecasts. Dr. Leung, the Chair of Public Health Medicine there, says at worst that it could continue to spread exponentially at a 1% spread rate compounded and ultimately infect 60-80% of the world, with as many as 51 million deaths, mostly in China. That sounds far-fetched to me.

But the unusual aspect to this virus is that it is contagious two weeks before symptoms show up, allowing it to spread quicker. And in China, they are suppressing the sale of cough syrups and things like it so that people can’t hide their symptoms to avoid quarantine. That’s how perverted this whole thing is.

John Nicholls, a professor of pathology, says that the coronavirus is more like a severe cold and should burn out in about six months. It’s currently spreading in East and Southeast Asia, where high sunlight, temperatures and humidity work against the virus, especially in the coming months. This actually sounds more logical to me.

At the present trajectory of about 1,700 deaths a month and 73,000 infections, that would suggest a peak at around 400,000 infections and 10,000 deaths. But at 10 times the reported figures, that could be 4 million infections and 100,000 deaths. Bad, but not a total disaster.

The bigger point is that this has already resulted in something like 300 million people being quarantined to their cities in China. Their rapidly growing supply chain breakdowns in production are hitting globally – especially South Korea and the U.S. Starbucks had to shut down big chunks of stores throughout China. And people have a greatly out-sized reaction to such potential pandemics. The normal flu is more dangerous in the U.S. than this is likely to be.

As I eluded to last week, this is something that money printing cannot stop. It can only help bolster the economic impacts…

If the bad case scenarios do accelerate instead, this could be the pin that pricks the greatest bubble in the world: China! And everything will implode from there, and money printing will not be fast enough or have the credibility to stop the worst meltdown since 1929-32.

We are in the dark here, as no government experts, even here, want people to panic over this. Hence, we aren’t getting good information.

So we’ll keep watching, as it is the biggest short-term economic factor, along with whether the Fed and other central banks will keep printing money aggressively to counter the economic impacts. And we are monitoring the Fed weekly.

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Avoiding the Car Companies

Let’s get one thing out of the way. Tesla. The iconic electric vehicle company produced about 360,000 cars last year and lost $864 million. That was a win; the company lost over $1 billion in 2018.

Founder and CEO Elon Musk thinks they might produce 500,000 cars this year. They might even turn a smidge of a profit. For that, investors have graced the company with a $135 billion market cap. I thought the company was an obvious short at $420. I still think so at $740.

Tesla is the one car company stock that’s moving higher. After losing more than $1.5 billion last year, Ford’s stock is back to $9, and GM’s stock fell back to $33, the price at which it went public (again) a decade ago, in November 2010.

This isn’t the end of the pain. Car companies, in general, are in a trick bag, and Tesla’s in the group, but for different reasons.

A couple of years ago, cities including Paris and Mexico City pledged to ban the registration of new fossil fuel cars by 2025. Several countries picked up the mantle, with France and England planning to ban new fossil fuel car sales by 2040, and Norway pledging the same by 2025. Last year, Britain moved the timetable forward, claiming it will ban the sale of new fossil fuel cars by 2035. Everyone is moving to curb vehicle emissions.

Whether you’re a climate change advocate or skeptic doesn’t matter. Governments are moving this direction and demanding that industries follow.

With global car sales trending a bit lower over the past year, this might sound like glorious news. A new mandate from the government gives car companies a golden opportunity to exploit – er, explore – a new market. But switching from internal combustion engines (ICEs) to electric rides isn’t simple, and it isn’t cheap.

You might not know it, but Ford actually sells electric vehicles, but it will take a sizable investment for them to ramp up production to a meaningful level. The company plans to invest $11 billion in electric vehicle capacity and deliver 16 electric models by 2022.

That’s somewhere between 24 and 36 months from now.

Clearly Ford wants to get in front of the governments mandating higher demand in the years and decades to come, but who’s going to buy all of these cars in the next three to five years?

Electric vehicles were a modest 2.0% of U.S. auto sales last year, that’s 350,000 out of 17 million. If we doubled that this year, and then again next year, we’d go from 2%, to 4%, to 8% in 2022. If car sales reach 18 million, which seems unlikely, that would be 1.44 million electric cars sold in the U.S. by all manufacturers.

Even if Ford captured 30% of the U.S. market, which again, seems highly doubtful, it would sell 540,000 electric vehicles domestically. That’s a pretty lousy return on $11 billion.

GM isn’t much better off. The company plans to spend $10 billion and bring 20 battery-powered electric vehicles to the market by 2023.

Volkswagen, the largest car seller in the world, plans to spend $90 billion.

All of this investment might be for good reason. As governments around the world forbid the sale of new ICE-powered cars, car manufacturers want to be ready for the switch. But so far, there’s no plan on

how they will turn profits as they make the transition.

Instead, it looks like they will burn through every dollar they make, leaving shareholders with precious little except the hope that their company is well-positioned for a questionable future.

As for Tesla, clearly the company is set to produce electric vehicles. It’s already proved there’s a niche market for high-end electric vehicles. But sales of the Model S and X have been falling off as the Model 3 picked up the slack. And with Ford, GM, Volkswagen, and a host of other companies bringing more electric models to market, Tesla will face increasing competition for the budget-conscious shopper.

When that happens, even Tesla will be fighting over limited market share in the electric vehicle space.

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Tesla Bubbling Up

Elon Musk was looking like a crazy man in June of 2019 when Tesla (Nasdaq: TSLA) stock plunged to a low of $179. But now he’s a real genius, with the stock peaking at $969 on February 4.

Welcome to bubble land. This is just another sign, along with the very bubbly performance in most of the FAANG stocks, that we are in the final orgasmic blow-off phase of the broader stock and tech-driven bubble.

This bubble clearly now only has months to go… not years. And these recent movements could be a sign that this bubble top is coming even sooner if the Fed’s repo explosion in money printing does abate instead of continuing.

Telsa dropped back just below $687 on February 6 and has been bouncing modestly since. It was up to $820 on the open this morning, but then quickly dribbled back down to $755, so no clear signs yet.

Tesla is tracking the extreme Bitcoin bubble of 2017 in pattern, though not in the percentage gains, with Bitcoin up 15 times vs. Tesla’s 5.5 times in a similar eight-month period. Still, the most dramatic of recent blow-off tech stock rallies.

If this first scenario continues to track, then Bitcoin could shoot up near term to $1,050 or so, then crash back to its bubble origin where it diverged from reality, back to around $400.

Here’s a second scenario showing Tesla peaking last week and bouncing a bit more before continuing down towards a $370 target.

In this scenario, we are bouncing into a rally that will soon fail and see those lows sooner.

Right now I’m in Sun Valley speaking at the Tony Robbins Platinum conference. The first big speaker was one of my long-time favorites, Niall Ferguson, author of The Ascent of Money. I’ll have more on him in Friday’s rant, but he sees the China bubble as the epicenter, as I do, and he sees Tesla building a major new plant in China and targeting that as the next big market… “What could go wrong here?” he comments.

It shouldn’t take long to see how this plays out with the extreme movements in recent months and days, and how much it affects the broader markets…

But again, another sign of the late stages of the greatest bubble in modern history right into the most important long-term cycle for stocks: The 90-Year Super Bubble/Great Reset Cycle.

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Propping Up the Economy

You know the saying: There’s more than one way to skin a cat.

Well, in the financial world, it’s important to remember that there’s more than one way for the Fed to run quantitative easing on the economy.

Because that’s what we’re seeing here. It’s obvious. The Fed is out there saying that they’re not running QE because they’re just buying repos and T-bills, not T-bonds to suppress longer-term interest rates.

But if you think about it, they are still printing money out of thin air and injecting it into the financial asset markets. By buying repos, Treasury Bills, and soon Treasury Bonds, the Fed is quite literally injecting money straight into that realm which creates more money chasing the same pool of assets.

It might not look like it on the surface, but there’s more than one way for the Fed to run QE.

This is exactly what Rodney and I have been tracking lately for Boom & Bust subscribers. In early September, the Fed suddenly injected $60 billion because repo rates had jumped up to 10% overnight. Banks weren’t lending, so the Fed had to step in.

And they’ve kept stepping in, to the tune of $256 billion. Now we’re in early February, and repos have dropped to $170 billion. That’s a big drop, upwards of $86 billion. At the same time, T-bills are going up, by about $82 billion in the last month. That’s more QE than ever. WE may be heading towards a higher balance sheet, printing money faster than ever.

Meanwhile, stocks are running on a two- or three-week lag, and they’ve been sideways for the past three weeks. Our stock indicator with the Fed balance sheet suggests that we should see stocks go sideways or down, potentially by 3-5% through late February. If we can hold there and the Fed keeps buying these T-bills and T-bonds and repos stay where they are, we’ll start to see a strong stimulus behind stocks.

But that’s a big “if,” and it’s dependent on the economy staying where it is despite all the political turmoil. So far, that part has worked out. The Fed kept pushing through the Iran situation and appears poised to press on with the coronavirus (though the same can’t be said for Chinese markets). Which makes us think that what’s been true for a while will continue to be so: As long as the Fed keeps printing more money net for any asset purchases, nothing will change unless something really, really bad happens.

The Fed’s policy is clear right now. Print about $80 trillion for T-bill or bond purchases a month. The wild card is whether repos require more printing, or whether they flatten out or go down. That is something we will keep tracking every week.

If the markets do keep going up on such continued rising stimulus of $80 billion a month on average, this “markets on crack” scenario will continue to accelerate. But it cannot go on forever and appears to be in that final blow-off stage, like late 1999 to early 2000, which will end badly.

As always, we’ll keep you updated.

[Click to Play]

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No Matter Who Wins, We All Lose

The 2020 presidential election cycle has been going on since November 9, 2016, the day after Trump’s upset victory, but with the Democratic primaries at hand, it’s kicking into high gear. As the field narrows, we’ll get a sense of the messaging that’s supposed to sway our votes.

As for Trump, he seems erratic and, from time to time, sounds incoherent. But if you stop reading Twitter and pay attention to his policies, he has remained remarkably consistent in following through with campaign promises.

Among other things, he cut taxes, reduced regulation, worked on slowing illegal immigration, appointed conservative judges, and scaled back government oversight. True, he didn’t create a “beautiful” health care program to replace the Affordable Care Act that would cost less and do more, but neither did the ACA.

On the other side of the aisle, the main message is to beat Trump, and then to work on sharing more of the wealth created by the nation with a wider group, improving healthcare, creating family benefits like paid leave and universal childcare, and raising taxes to pay for some of it.

No one pretends to care about the fact that we’ve mortgaged our future.

The Balance Sheet

I’m not referring just to the national deficits and debt, which I touched on earlier this week. Those are easy to see, and getting bigger. I’m talking about programs and costs that we know exist, but haven’t hit our national balance sheet yet, so we sort of ignore them.

Social Security and Medicare are the easiest examples, but they’re not the only problems.

When President Lyndon Johnson rolled entitlement programs into the federal budget, he wanted to mask the growing national deficit by adding in entitlement contributions which far outstripped benefit payments. That was in 1968, in a galaxy far, far away.

Fifty-two years later, entitlements eat up 60% of the federal budget and both programs run a deficit. Medicare will eat through its trust fund in five or six years, while the Social Security Trust Fund might last another 10 to 15 years. Then what?

If we try to model the real cost of the programs, estimating what we need to save today to pay for the benefits tomorrow, the numbers quickly jump to the tens of trillions of dollars. Then we quit paying attention.

Then there are roads, bridges, dams, and airports, otherwise known as infrastructure. The American Society of Civil Engineers (ASCE) has been warning about our deteriorating infrastructure for more than a decade. In 2009, President Obama signed the American Recovery and Reinvestment Act, pledging to put a huge chunk of the $840 billion toward “shovel ready” projects.

That’s not where we spent the money.

Less than $50 billion actually went toward such improvements, with most of it spent on plugging big holes in state budgets.

The ASCE estimates that to make our infrastructure safe, we must spend $4.5 trillion by 2025. I’ll give you three guesses as to whether or not that will happen, and if the first two aren’t “Not a chance,” then they don’t count.

We’ll wait, and watch bridges fail and dams burst before we act. But the time is coming when we won’t be able to put off such spending.

And then there are state and local public pensions, another multi-trillion-dollar hole. Pew Research estimates that we’re $4.3 trillion behind in funding, with cities like Chicago and states like Illinois close to being bankrupt.

Beyond areas with identifiable costs, we’ve got things like environmental concerns. Whether you think it’s happening or not, the governments of the world are moving toward intervention… and it’s going to be breathtakingly expensive.

No Solutions

All of these issues have one thing in common – they show how we’ve used an asset or created a liability without setting aside the funds to pay for it. In short, we’ve mortgaged our future. And neither party is working on a solution. Not because the problems are insurmountable, but because the answers are obvious, and call for sacrifice.

We need to lower benefits and raise taxes. Every one of the issues above can be addressed through a combination of lower benefits and raised taxes. Eventually, every issue will be addressed this way, it’s just the “when” that’s in question.

The first economic shot across the bow should come from failing pensions in the next three years, followed by the bankruptcy of Medicare. Along the way, we could have a disaster or two from failing infrastructure. I don’t expect any of these things to cause a radical change in how we go about our daily lives. Instead, we’ll see incremental changes that build toward a massive restructuring of how we fund the assets and benefits that we’ve been using or promised for decades. If you’re receiving benefits, or expect to in the future, consider what will happen if the checks get smaller. If you’re paying taxes, ask how you’ll cope with bigger tax bills.

If you’re one of the unlucky ones in the middle, expecting to get benefits while paying a lot of taxes, chances are you’ll get squeezed even more, no matter whom you vote for.

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